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Friday February 1, 2008 - 12:36:48 GMT
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FOREX NEWS-Dollar eyes all-time lows vs euro ahead of data

Fri Feb 1, 2008 6:41am EST

(Adds quotes, changes byline, updates prices)

By Simon Falush

LONDON, Feb 1 (Reuters) - The dollar edged lower on Friday to within a cent of record lows against the euro and at weak levels against other major currencies, as traders bided time ahead of critical U.S. employment data.

The January jobs report due at 1330 GMT, along with U.S. factory activity figures, will offer investors further clues to how close the world's largest economy is to recession.

Some analysts believe the U.S. economy is already contracting, and the massive reduction in interest rates over the last four months of over two percentage points clearly shows the Federal Reserve is worried too.

These rate cuts and growing worries over the economy have weighed on the dollar. But expectations of further credit-related financial market turmoil have prompted some U.S. investors to withdraw funds from overseas markets, limiting the upside of currencies including the euro, sterling and yen.

A Reuters poll ECON shows expectations centre on a gain of 80,000 non-farm payroll jobs in January, compared with a paltry 18,000 in December, which had fuelled the view that the economy was on the brink of recession.

"Everyone is looking for a decent number but despite the optimism the dollar is looking weak," said Niels Christensen, FX strategist at Nordea in Copenhagen. "If we don't get a healthy report, the dollar will be very vulnerable and we could easily see the euro move to an all-time high."

The unemployment rate is expected to hold steady at 5 percent and the ISM manufacturing index at 1500 GMT could also trigger dollar weakness if it comes in below the 47.3 consensus forecast.

A reading below 50 denotes contraction in the sector, providing further evidence that a recession is in the offing.

At 1118 GMT the dollar was 0.1 percent lower against a basket of major currencies .DXY at 75.11, close to the two-month low just below 75.00 touched on Thursday.

The euro was 0.1 percent higher on the day at $1.4877 <EUR=>, eyeing a move above $1.49 toward the record high of $1.4966 and the psychological target of $1.50.

Traders reported heavy buying this week of euro call options with a strike price of $1.50 expiring later Friday, indicating strong interest in the market to see the euro rise to that level soon.

RECESSION FEARS

The dollar held steady against the yen at 106.36 yen <JPY=>, and dipped a little against the Swiss franc to 1.0781 francs <CHF=>, within half a cent of its all time low struck Thursday.

Fears of a U.S. recession prompted an emergency, 75-basis-point rate cut by the Fed last week denting the currency's yield appeal.

The U.S. central bank followed that up by slashing rates by half a percentage point to 3.0 percent earlier this week, leaving the fed funds rate the lowest among developed countries save Japan and Switzerland.

This contrasts with monetary policy in the euro zone which has seen rates on hold at 4 percent since June 2006. Markets are pricing in more than 50 basis points of cuts by year-end.

But ECB policymakers' rhetoric continues to be hawkish and high inflation -- at 3.2 percent well above the 2 percent target -- is seen as limiting the bank's room for manoeuvre.

Eurozone manufacturing data grew faster than expected in January, data released on Friday showed, as the pace of cost inflation and prices charged at the factory gate accelerated [ID:nL29337169].

"The combination of a firm PMI and upside inflation risks, both the input and output price measures rose, should ensure that ECB rhetoric remains hawkish for now, providing support for the EUR/USD," Calyon said in a note to clients. (Reporting by Simon Falush; Editing by Tony Austin)

© 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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