Euro hits record high against U.S. dollar, climbing to US$1.3878

The euro hit a record high against the U.S. dollar on Wednesday, climbing as high as US$1.3878 amid speculation that the Federal Reserve will soon cut interest rates by as much as half a percentage point.The 13-nation euro broke through its previous record of $1.3852, reached in late July. It then eased back to $1.3841 in morning European trading - still a little above the $1.3832 it bought in New York late Tuesday.The dollar, which has hovered within a few cents of its record low over recent weeks, has come under new pressure since the U.S. Labour Department issued unexpectedly poor August jobs data on Friday.

That report strengthened speculation that the Fed will cut interest rates at its Sept. 18 meeting. A cut from the current rate, 5.25 per cent, would be the first reduction in four years.

The new record came as "traders continue to second-guess how (Fed chairman Ben) Bernanke and his team will act" next week, said James Hughes, a market analyst at CMC Markets.

Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.

Bernanke offered no hints during a speech in Germany on Tuesday.

"The fact no mention of monetary policy was made in yesterday's speech in Berlin has done little to placate the market, and we're also seeing growing speculation that the Fed may elect to cut rates by a half a point as they try to steer the economy away from recession," Hughes said.

The European Central Bank last week put its own two-year run of gradual interest rate rises on hold, but left many economists still expecting a quarter-point increase from the current four per cent before the end of the year.

The euro's strength threatens to make European exports more expensive, and therefore less competitive - although the currency's movements this year have been gradual rather than abrupt.

While the weaker dollar makes U.S. exports more competitive, it hits the spending power of American tourists traveling to Europe.

The dollar was little changed on Wednesday against the British pound, which slipped to $2.0307 from its level of $2.0317 in New York late Tuesday.

The dollar was slightly lower against the Japanese currency, even as Prime Minister Shinzo Abe announced that he will resign, putting an end to his troubled year-old government. The dollar slid to 114.11 yen from 114.3 yen.