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Thursday December 20, 2007 - 11:43:24 GMT
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FOREX NEWS-Dollar hits 2-month highs vs euro, currency basket

Thu Dec 20, 2007 6:31am EST

(Changes byline, updates prices adds quotes)

By Toni Vorobyova

LONDON, Dec 20 (Reuters) - The dollar rose to two-month highs against the euro and a basket of major currencies on Thursday, bolstered by investors repatriating funds and covering of short positions in the U.S. currency before year-end.

The greenback also hit fresh three-month highs versus sterling, having broken through the psychologically key $2 mark the previous day after minutes from a Bank of England meeting suggested it may cut rates again as soon as January.

In contrast, expectations of Federal Reserve rate cuts next year have been slightly scaled down in the wake of last week's stronger-than-expected U.S. data -- though markets are still pricing in over 75 basis points of easing by September FEDWATCH.

Traders said market liquidity was thinning ahead of the year-end holiday season, and this could exacerbate the impact of even the smallest movements in currency markets.

"It's position-squaring in thin markets dominating the picture today and supporting the dollar, after people had cut back a little bit their rate cut expectations after strong retail sales and surprising inflation data in the U.S.," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

By 1114 GMT, the euro had fallen to a fresh two-month low of $1.4310 <EUR=>, down around 0.4 percent on the day.

Sterling fell as low as $1.9881 <GBP=>, and hit a 1-1/2 year trough on the Bank of England's trade-weighted basis <=GBP>.

The dollar also rose to a three-month high versus the Icelandic crown <ISK=>, after Iceland's central bank left rates on hold, disappointing minority expectations for a hike.

Against a basket of major trading-partner currencies, the dollar rose to its highest since late October at 77.854 .DXY, taking the gains for December so far to over 2 percent -- on track for its best month since September 2005.


But the greenback softened versus the yen, with the Japanese unit supported by a Chinese interest rate hike and merger and acquisition related flows into Japan as the bidding war for house builder Daito Trust Construction Co heats up.

"People tend to see a real close link between Japan and China. In such thin markets it (a Chinese rate hike) gives the yen a little lift," said Praefcke at CBCM.

The dollar was down 0.2 percent at 113.23 yen <JPY=>, while the euro fell half a percent to 162.18 yen <EURJPY=>.

The Japanese currency held firm even though all of the Bank of Japan's nine board members agreed to hold the central bank's overnight rate at 0.5 percent on Thursday, the first unanimous decision to do so since July.

For the past six meetings, board member Atsushi Mizuno has been the constant, lone dissenter against holding rates and has argued for a rate rise.

But even he agreed to Thursday's action, bolstering the market's view that a rate rise may have to wait until at least the second half of 2008.

A relatively thin calendar on Thursday features the final reading of U.S. third quarter economic growth and weekly jobless claims, both at 1330 GMT.

"Jobless claims will be the most relevant print as the market continues to monitor labor markets as a gauge of U.S. economic resilience," JP Morgan said in a research note.

"The dollar may be vulnerable to knee-jerk selling on a weak number given recent strength (in the job market)." (Editing by Mike Peacock)

© 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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