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Dollar gets trashed as U.S. shutdown looms

April 8, 2011 |  4:11 pm

Friday turned into beat-up-the-dollar day in world markets, as the greenback tumbled against many other major and minor currencies.

The DXY index (charted below), which measures the buck against six other key currencies, slid 1% to 74.86, its lowest level since December 2009.

Dxy48 And paper currencies’ archrival, gold, climbed to a new high, nearing $1,500 an ounce.

Traders said the greenback was undermined in part by the threat of a U.S. government shutdown, which understandably doesn’t inspire much confidence abroad.

The dollar’s sell-off was an acceleration of the trend in place for most of this year, as the Federal Reserve has continued with easy-money policies that weaken the currency’s value.

One of the Fed’s goals is to help U.S. exporters by making their goods less expensive for foreign buyers. That’s what happens when the dollar slumps.

The flip side, of course, is that a falling dollar erodes Americans’ purchasing power and therefore our standard of living.

The greenback’s slide on Friday followed the European Central Bank’s widely expected decision on Thursday to raise its benchmark short-term interest rate for the first time since mid-2008. Though the increase was modest -- from 1% to 1.25% -- it was yet another reminder that many central banks around the global are tightening credit at a time when the Fed is holding rates near rock-bottom.

Higher interest rates naturally tend to attract money to a currency.

The euro jumped to $1.448 Friday, up from $1.431 on Thursday and the highest since January 2010. The Australian dollar shot up to a modern-day record of $1.056 U.S., up from $1.047 on Thursday.

The dollar also fell against the Brazilian real, the Canadian dollar and the Korean won, among others.

Some investors continued to choose hard assets over currencies: Gold futures in New York rose $14.90 to $1,473.40 an ounce, an all-time high (unadjusted for inflation). Silver soared $1.06 to $40.60 an ounce, its highest since 1980.

A weaker dollar also drives more foreign investors and traders into commodities because most raw materials are priced in dollars. That mean commodities get cheaper as foreign currencies gain in value against the dollar.

When it rains, it pours.

-- Tom Petruno