Euro rises above $1.41 for first time before slipping back

FRANKFURT, Germany -- The dollar briefly fell to another low against the euro Friday in European trading before regaining some ground.

Breaking above $1.41 for the first time, the euro went as high as $1.4119 in morning trading in Europe. The shared currency of the 13-nation euro zone later slipped to $1.4056, below the $1.4076 it bought in late New York trading Thursday.

The dollar rose to 0.9999 Canadian dollars, up from 0.9993 on Thursday when it reached one-to-one parity with the loonie for the first time since November 1976.

It also rose slightly to 115.61 Japanese yen from 114.44 yen late Thursday.

But the dollar slipped against the British pound which rose to $2.0139 in European trading compared with $2.0099 late Thursday.

The dollar has fallen this week after the U.S. Federal Reserve cut its benchmark rate by a bigger-than-expected half a percentage point to 4.75 percent, a response to market turbulence in the United States and elsewhere in the fallout from a wide subprime mortgage crisis.

Howard Archer, the chief U.K. and European economist for London-based Global Insight, said there were "widespread expectations" that the Fed will continue to lower rates in the coming months, while the European Central Bank is still inclined to cut rates. That would give the euro a relative advantage over the dollar as an investment by raising the return on cash investments.

The ECB has kept its benchmark rate unchanged at 4 percent and the Bank of England is expected to keep its rate unchanged at 5.75 percent when it meets next month.

The rising euro is also becoming a political issue, particularly in France, where President Nicolas Sarkozy called on the ECB to follow the Fed and cut its rates.

But ECB President Jean-Claude Trichet has said the ECB must remain independent.

"I don't criticize Trichet," Sarkozy told French television on Thursday. "But I'm saying: look at what's going on," adding "in the current economic situation, the Fed cuts rates, the ECB doesn't cut them."

France has actively courted, if not stalwartly demanded, the ECB ends its nearly two-year rate hike campaign for good.

But in a speech Thursday night, Trichet said the bank's independence is the cornerstone of its monetary policy because it "allows the central bank to pursue its primary objective and to take full responsibility for its action."

Lower interest rates, while used to jump-start the economy, can also weaken a currency by giving investors less return on investments denominated in the currency.

The Fed's move put more pressure on the U.S. dollar because it made returns on investment in other countries more valuable. The weak dollar also means that American goods are cheaper for overseas buyers, which can help manufacturing and producers, and it can help companies with big foreign operations turn a larger profit by converting overseas profit into dollars.

On the other hand, a steadily weakening dollar could also discourage foreign investors who buy the country's debt. As investment in U.S. Treasury securities dwindles, the government will have to pay higher rates at weekly auctions to find buyers for its bills, notes and bonds. That eventually could push up borrowing costs for all Americans.

It can also hurt companies in the euro zone. Speaking in a radio interview, Airbus executive Fabrice Bregier said that his company's "Power8" cost-savings and restructuring program was based on a euro-dollar rate of $1.35 and aimed at generating 2 billion euros ($2.8 billion) in savings. If the euro rises to $1.45, he said Airbus would have to seek another 1 billion euros ($1.4 billion) in savings.

Regardless of an ECB rate cut, David Jones, chief market analyst at CMC Markets in London, said fears of more U.S. interest rate cuts could drive the euro higher.

He said that remarks by Fed Chairman Ben Bernanke before the U.S. Congress on Thursday did not assuage fears about the U.S. economy, but rather "reignited fears that there may be further bad news to come with regard to the U.S. sub-prime mortgage market."

Both Archer and Jones said that those fears are putting more pressure on the dollar and causing buyers to look to safer havens, namely the euro and the British pound. It is also likely that the dollar will continue to weaken, pushing the euro higher in value.

Jones said that it's not quite a crisis for the dollar but "it's fair to say that confidence in the greenback has been truly shaken."