Jul 12, 2007 4 min read

By Jackie Farwell AP Business Writer

NEW YORK (AP) – The dollar traded mixed Wednesday after hitting a new record low against the euro overnight on concerns about the struggling U.S. housing market.

The 13-nation euro traded as high as $1.3784 before settling back to $1.3761 in late New York trading, up from $1.3729 late Tuesday.

The British pound hit a fresh 26-year high against the dollar, rising to $2.0362 – its highest level since June 1981 – before retreating to $2.0334. The pound traded at $2.0267 late Tuesday.

“Currency markets have arguably been left focusing on just one point at the moment and that’s concern over the possible collapse of the U.S. subprime lending market,” said David Jones, chief market analyst at CMC Markets in London. The impact on the dollar, he added, was “sustained pressure through the overnight session.”

The subprime market refers to loans, such as mortgages, given to borrowers with spotty credit histories that tend to have higher interest rates. Subprime borrowers have missed a lot more payments on loans amid higher interest rates and a slowdown in the U.S. economy.

Federal Reserve officials eased some fears surrounding subprime lending on Wednesday. Philadelphia Federal Reserve President Charles Plosser said the financial system is equipped to handle home loan risks, while Fed Governor Kevin Warsh said subprime troubles have failed to drag down the overall economy.

In other trading, the dollar barely rose against the Japanese yen, inching up to 122.04 yen from 122.03 yen late Tuesday after the Japanese government said the country’s current account surplus expanded for the fifth straight month in May, auguring well for economic growth in the second quarter.

The dollar rebounded some versus the Canadian dollar, rising to 1.0554 from 1.0512 late Tuesday. The dollar dropped to a 30-year low against the Canadian dollar leading up to Tuesday’s expected rate hike by the Bank of Canada.

The dollar bought 1.2038 Swiss francs, down from 1.2053 late Tuesday.

The euro started surging against the dollar on Tuesday, breaking through the $1.37 mark for the first time since it started trading in 1999, as concerns about the U.S. economy were fueled by discouraging growth forecasts from key retailers and homebuilders.

The higher euro makes goods from the 13-nation currency zone more expensive for customers abroad, or cuts into manufacturers’ profits if they try to keep the U.S. dollar price of products constant.

However, European Central Bank executive board member Juergen Stark downplayed those concerns earlier this week. He noted that more than 50 percent of euro-zone countries’ exports go to other euro-zone members and so are not vulnerable to currency fluctuations.

On Tuesday night, he noted that “the improvements in economic fundamentals are being reflected in exchange rates.”

Along with the rise in the pound, the stronger euro also makes visits to much of Europe more expensive for travelers from elsewhere and makes shopping trips to the U.S. more appealing to Europeans.

The Federal Reserve has left its benchmark rate unchanged at 5.25 percent for a year following two years of steady increases.

That contrasts with the ECB, which has raised rates steadily and is expected to do so again to 4.25 percent in September. The Bank of England, meanwhile, last week increased its benchmark rate to 5.75 percent, a six-year high.

Higher interest rates, a weapon against inflation, can bolster a currency by giving better returns on fixed-income investments.

“The relatively robust British Retail Consortium survey for June reinforced expectations that the Bank of England may well have to act again, while the marked narrowing in the May trade deficit has also been supportive for the pound,” said Howard Archer, chief U.K. and European economist at Global Insight.

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Associated Press writers Jacob Comenetz in Berlin and Matt Moore in Frankfurt, Germany, contributed to this report.

AP-ES-07-11-07 1618EDT