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Tuesday February 19, 2008 - 22:25:30 GMT
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FOREX NEWS-Dollar slips as rate differentials back in focus

Tue Feb 19, 2008 4:26pm EST

(Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Feb 19 (Reuters) - The dollar fell on Tuesday as investors worried that a spike in oil prices to record highs could further slow the U.S. economy and prompt the Federal Reserve to again cut interest rates.

The high-yielding Australian and New Zealand dollars posted strong performances, after booking early gains as a rise in global equities and commodities bolstered investor appetite for risky trades.

The Aussie rose to a three-month high versus the greenback, after minutes from the Reserve Bank of Australia's February policy meeting cemented expectations for more interest rate hikes, boosting the currency's appeal to global investors.

Expectations that the European Central Bank would keep its benchmark lending rate at 4 percent longer than previously anticipated pushed the euro to a two-week peak of $1.4757 <EUR=>, according to Reuters data.

"We are beginning to focus back on interest rate differentials. The fact is in Europe rates are at least holding steady, while in Australia and New Zealand they are going to be raising rates," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

"Continued news of write-downs is really weighing on sentiment. Also the fact that oil touched $100 a barrel is leading some to believe that the U.S. might slow further."

The Aussie dollar rose as high as US$0.9237 <AUD=>, a level last seen in early November. It last traded at US$0.9188, up 0.6 percent from late on Monday. This was as U.S. stocks surrendered an earlier rally to end slightly lower on the day.

Minutes from the RBA's Feb. 5 policy meeting showed the central bank had debated a more aggressive 50 basis point rate hike. While the RBA decided in the end on a modest 25 basis point rise in the cash rate to an 11-year high of 7 percent, the minutes pointed to further monetary tightening ahead.


The New Zealand dollar rode on the coattails of the Aussie's rally, climbing to US$0.8022 <NZD=>, its highest level since July. It was last up 0.3 percent at US$0.7971.

The euro rose 0.5 percent at $1.4726 <EUR=>, while the dollar was down 0.4 percent at 107.71 yen <JPY=>. The Japanese currency held on to overnight gains, booked on a brief bout of risk aversion following news about write-downs on risky assets from European banks Barclays Plc and Credit Suisse.

"The market realizes ECB rates are not going down. This was the primary reason why the euro was weak in the last two weeks," said Boris Schlossberg, senior currency strategist at in New York.

"Once they realized that the ECB was not going to follow the Fed and that the Fed would have to continue lowering rates to stabilize the housing market the flows got right back into the euro. We are seeing a readjustment of expectations."

The U.S. dollar was down 0.1 percent against a basket of major currencies .DXY at 76.039.

Credit Suisse (CSGN.VX: Quote, Profile, Research) said it had written $2.85 billion off the value of its asset-backed investments, while Barclays (BARC.L: Quote, Profile, Research), Britain's third largest bank, raised its 2007 write-down on the value of risky assets to 1.6 billion pounds ($3.1 billion).

U.S. consumer inflation and housing data await investors on Wednesday and could fuel the debate on the prospects of stagflation in the world's largest economy.

"The story of whether the U.S. economy is in a recession or in the beginnings of a recession, or whether or not is experiencing stagflation will continue to weigh at least until we start to see the beginnings of the Fed cuts take effect," said Tempus Consulting's Meadows.

The Fed has lowered its benchmark overnight lending rate by 225 basis points to 3 percent since mid-September in a bid to stave off a recession following a sharp housing downturn. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)

© 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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