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Thursday December 13, 2007 - 21:28:51 GMT
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FOREX NEWS-Dollar climbs after US data eases credit fears

Thu Dec 13, 2007 4:23pm EST

(Updates prices, adds quote)

By Kevin Plumberg

NEW YORK, Dec 13 (Reuters) - The dollar rose on Thursday after U.S. retail sales and producer prices data strengthened the view that the U.S. economy will not slip into a recession despite a persistent credit crunch.

The unexpectedly high numbers underpinned the modest scale of the Federal Reserve's quarter-percentage-point interest rate cut on Tuesday, amid widespread criticism the U.S. central bank could have done more to ease the pain from the credit crisis.

"Today's data support the Fed's view that the economy is still quite solid and that they can't just lower by 50 basis points, as many people had wanted," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.

By late afternoon, the euro fell 0.6 percent against the dollar to $1.4620 <EUR=> after triggering a series of automatic sell orders on the way down to a session low of around $1.4579. Last week, the euro hit a 1-month low of $1.4610.

The dollar rose 0.6 percent against the Swiss franc to 1.1415 francs <CHF=>. Sterling <GBP=> slid 0.4 percent to $2.0390, hit earlier by weak British housing data. Against the yen, the dollar was largely unchanged at 112.23 yen <JPY=>.

Currency moves on Thursday were exacerbated by thinning liquidity as the end of the year approaches, traders said.

The Fed this week cut its benchmark federal funds rate by a quarter point to 4.25 percent, less than many had expected. However, after Thursday's data, futures reflected a small chance that U.S. interest rates may not need to fall next year as low as previously thought.


Initial enthusiasm faded among equity investors for a plan hatched by several central banks from major economies, including the Fed, to address the global liquidity crisis.

As part of the plan, the Fed will hold two auctions of $20 billion each under a new funding source called the Term Auction Facility (TAF), as well as opening up currency swaps with the European Central Bank and Swiss National Bank.

At first, this was seen as a sign that central banks were committed to supporting financial companies struggling to secure funds for hard-hit balance sheets before year end. This fanned risk appetite and thus carry trade purchases of high-yielding currencies such as the Australian and New Zealand dollars.

But the initial euphoria proved short-lived, and European and Asian stock markets fell on Thursday as investors speculated that these measures would not immediately resolve the credit crunch sparked by problems in the U.S. subprime mortgage market, analysts said.

"The announced auctions from the Fed and other central banks are relatively small and will have a limited direct impact on the money markets," market strategists from Citibank said in a note.

The Australian dollar fell 0.7 percent to US$0.8760 <AUD=> but it has remained in a US$0.9085 to US$0.8650 range for the last month. The New Zealand dollar dropped 1 percent to US$0.7811 <NZD=>.

Morgan Stanley strategists said the dollar is at risk of falling against the yen if investors' willingness to take chances for higher returns succumbs to a desire to play it safe.

"The Fed's collaboration with other central banks to address funding market pressures sends a strong message. But our sense is that funding pressures signal structural problems that are unlikely to abate after year-end," they said in a research note.

"Dollar/yen may be poised to move lower in that environment." (Editing by James Dalgleish)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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