msnbc.com news services
updated 4/27/2007 4:54:10 PM ET 2007-04-27T20:54:10

The dollar slumped to a record low against the euro on Friday as weak U.S. growth figures reinforced fears of a widening economic disparity between Europe and the United States.

The euro's surge will not be kind to Americans visiting Europe this summer, who will pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.

The euro hit $1.3682, shooting past its previous high of $1.3667 from December 2004, after the U.S. Commerce Department reported that economic growth slowed to a 1.3 percent annual rate in the first quarter, its weakest performance in four years.

The 13-nation currency then settled back to $1.3655 in late European trading, still up from its $1.3601 level in New York late Thursday.

“After some mixed figures ... the euro has broken through its previous all-time,” noted James Hughes, a market analyst at CMC Markets in London, adding that they saw some buy orders as high as $1.3681.

The euro also hit a record against the Japanese yen after inflation data from Germany, coupled with improved business and consumer sentiment, pushed it to 162.91 yen, up from the previous high of 162.53 yen on Thursday.

A higher euro makes goods from the euro-zone more expensive for customers abroad, or cuts into manufacturers’ profits if they try to keep the U.S. dollar price of products constant.

Along with the rise in the British pound, which broke through $2 earlier this month for the first time in nearly 15 years, the stronger euro makes visits to much of Europe more expensive for travelers from elsewhere and makes shopping trips to the U.S. more appealing to Europeans.

Philadelphia physicians Ritu Pierce, 31, and Donna Roy, 36, had to make adjustments during their trip to Rome.

“It’s definitely different from the past, when you could travel around Europe, especially in countries like Greece, with a small amount of money,” said Pierce.

“We don’t want to shorten our stay, so we are finding low-profile hostels to sleep and grocery stores to get pizza or wine for cheap,” Roy said. “Thank God, Rome has a lot of free beauties to offer, like monuments and beautiful piazzas. You don’t need money to enjoy that.”

Karen Sebastian, an American high school teacher visiting the Brandenburg Gate in Berlin with a group of high school students from Brattleboro, Vermont, was startled by the dollar’s slide.

“I am glad that I changed all my money before I came. It was a great shock when I saw what the exchange rate was,” Sebastian said.

On Friday, the British pound was trading at $2.0022, up from $1.9910 late Thursday. The dollar fell against the yen, dropping to 119.41 yen from 119.63 yen in New York.

The euro had been tantalizing close to a new high for nearly two weeks, climbing to $1.3664 on Wednesday. But expectations for poor U.S. economic results had traders certain that Friday would be the decisive point.

The reading of U.S. gross domestic product, considered the best barometer of the country’s economic fitness, was the weakest since a 1.2 percent pace registered in the opening quarter of 2003. It underscored just how much momentum the U.S. economy has been losing as it copes with the strain of the troubled housing market.

The dollar’s woes aren’t confined to Europe: It is at a 17-year low against the Australian dollar, hovering near 26-year lows against the British pound and at an all-time low against the Chinese yuan.

How did that come to pass? A combination of factors, said Howard Archer, chief U.K. economist of Global Insight in London.

“The U.S. dollar has been pressurized significantly by softer U.S. growth, concerns over the housing market, and the increased possibility that the Fed will cut interest rates later this year,” he said.

If the Fed starts cutting interest rates from the current level of 5.25 percent while other regions are still raising theirs, capital movement into the U.S. could suffer, Archer said.

“This is potentially worrying for the dollar,” he said.

The euro rose from a low of 82 U.S. cents in October 2000 to the previous high of $1.3667 on concerns over the enormous U.S. trade and budget deficits.

But a string of rate increases by the Federal Reserve had helped cushion the decline of the dollar. Higher interest rates, used to combat inflation, can bolster a currency by making certain types of investments more attractive.

Of late, the Fed has left rates unchanged even as the European Central Bank has steadily increased the cost of borrowing.

The euro began its recent run against the dollar on April 12, after the European Central Bank held its benchmark rate steady at 3.75 percent but set the scene for a raise to 4 percent in June.

An increase would be aimed at countering threats of inflation in the euro zone, a bloc of 317 million people that accounts for more than 15 percent of the world’s GDP.

How high could the euro climb against the dollar? Not very far, most analysts said, noting that a major increase could lead the ECB to stop raising rates or even start cutting them.

Commerzbank economist Michael Schubert said the euro is likely to rise in the coming weeks “owing largely to speculation” but will likely retreat to $1.30 by end of 2008.

© 2013 msnbc.com

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