Friday February 22, 2008 - 12:02:52 GMT
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Reuters - www.reuters.com
FOREX NEWS - Euro hits 2-week high vs lacklustre dollar
By Simon Falush
LONDON, Feb 22 (Reuters) - The euro hit a two-week high against a lacklustre dollar on Friday as above-forecast euro zone service sector data contrasted with regional U.S. factory activity putting on its weakest show since the last recession.
The euro zone services PMI rose to 52.3 in February from 50.6 the previous month, moving further away from the 50 watermark between contraction and growth and further dampening expectations of near-term interest rate cuts.
That was in stark contrast to Thursday's Philadelphia Fed's business index which fell to minus 24 in February, showing the deepest contraction in activity since 2001 and much worse than forecasts for minus 11. [ID:nN21572086]
"The market today is focused on dollar selling," said Derek Halpenny, senior currency economist at BTM UFJ.
"If you look at the inflation picture, the U.S. is the place where the market is least concerned so it is the most likely to see interest rate cuts."
U.S. markets are now fully pricing in a 50 basis point cut at the Federal Reserve's next meeting in March to 2.50 percent and factor in a small chance of an even bigger 75 basis points.
That would add to an unusually aggressive 125 basis points of cuts in January as the Fed tries to fend off a recession in the world's biggest economy. FEDWATCH
The euro rose to a two-week high of $1.4853 <EUR=>, from around $1.4815 before the PMI data.
AMMUNITION FOR HAWKS
For the European Central Bank, investors now see less than a 50 percent chance of a cut by end-June -- compared to pricing in almost two cuts on that time horizon a fortnight ago FEIM8.
"Clearly (the data) is much better than expected and at a time when inflation remains of concern it supplies ammunition for the hawks at the ECB, at least in the short term, which is supportive of euro/dollar," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.
The rise in the euro dragged down the dollar index to a two-week low of 75.418 .DXY.
The dollar fell 0.3 percent to 107.00 yen <JPY=>, while the euro lost 0.15 percent to trade at 158.76 yen <EURJPY=>.
The yen drew some support from weaker equity markets and shrugged off news that the Japanese government had lowered its assessment of the economy [ID:nTKU003056].
HEAD SOUTH FOR GROWTH
The Australian dollar strengthened by more than half a percent to $0.9250 <AUD=>, hitting its highest level since November.
It remains one of the best performing major currencies this year, up over 5 percent, helped by expectations that interest rates could rise further from an already high 7.0 percent.
It has also benefited from a surge in metals prices like gold, which the country exports, as well as a partial revival of carry trades, where investors borrow funds in the low-yielding Japanese currency to buy higher-yielding assets.
"Investors are looking for the safest economies where there are ... prospects of monetary tightening and it's difficult to see evidence of a slowdown for Australia," said BTM's Halpenny.
The New Zealand dollar with interest rates at 8.25 percent rose by 0.8 percent to US$0.8075, its highest since July <NZD=>. (Editing by David Christian-Edwards)
Â© Reuters 2008 All rights reserved
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