Monday March 31, 2008 - 22:08:32 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar logs weakest quarter vs euro since 2004
(Recasts, updates prices, adds comments, detail, byline)
By Steven C. Johnson
NEW YORK, March 31 (Reuters) - The dollar was headed on
Monday for its biggest quarterly loss against the euro in four
years after a sharp gain in euro zone prices reinforced the
divergent paths of U.S. and European benchmark interest rates.
A report showing annual euro zone consumer prices rose in
March at their fastest pace since the euro was launched in 1999
sent the zone's common currency as high as $1.5895, just shy of
a record peak set two weeks ago, before investors booked
profits and pushed it back to $1.5785 <EUR=> in late trade.
The euro remained up 8.2 percent against the dollar this
year, however, on track for its biggest quarterly gain since
"The euro's upward trend lost some momentum today but that
doesn't change the underlying bearish dollar sentiment," said
Matthew Strauss, currency strategist at RBC Capital Markets in
"Although some came into the year thinking the worst was
behind us, the first quarter was clearly one in which markets
struggled to get a handle on just how deep the problems in the
U.S. economy really were," he added. "And to call a bottom now
is still a very risky call. It's too early to say the worst is
behind us and the dollar's in for a sharp rebound."
The euro zone data left traders betting an inflation-weary
European Central Bank would leave interest rates on indefinite
hold at 4 percent. The Federal Reserve, though, is widely
expected to cut rates further to boost economic growth, making
dollar-denominated assets less attractive to global investors.
The dollar index .DXY, a gauge of the greenback against a
basket of major currencies, was down 6.4 percent this year,
also targeting its worst performance since the fourth quarter
Against the yen, the dollar was up 0.6 percent from late
Friday at 99.69 yen <JPY=> as fiscal year-end activity from
Japanese investors and corporates kept the currency under
pressure, traders said.
So far this year, though, the dollar has lost more than 10
percent against the yen, its poorest showing since the third
quarter of 1999.
DOLLAR AS FUNDING CURRENCY
The biggest problem for the dollar heading into the second
quarter remained expectations of lower interest rates.
The Fed has already slashed rates by 3 percentage points
since September in a bid to restart flagging growth, pushing
the federal funds rate to 2.25 percent, the second-lowest among
major economies, after Japan.
On an inflation-adjusted basis, U.S. rates are now the
lowest in the developed world, and that keeps pressure on the
greenback by encouraging investors to borrow dollars cheaply to
finance purchases of higher-yielding currencies and assets.
"The U.S. economic malaise has been as bad as everyone
envisioned, and by accelerating its rate cuts, the Fed has
turned the dollar into an instant funding currency," said Adam
Fazio, currency strategist at CIBC World Markets in New York.
The euro also scaled all-time peaks at 79.82 pence
<EURGBP=>, with sterling depressed by soft housing and service
Money markets are now pricing in an around 90 percent
implied chance of a quarter-point ECB rate cut from the current
4 percent by year-end -- compared with expectations of nearly
three quarters of a point of easing seen a month ago FEIZ8.
Higher-yielding currencies such as the Australian <AUD=>
and New Zealand <NZD=> dollars tracked equity markets,
indicating that nervousness about the health of the global
economy remains at the forefront of investors' minds.
(Additional reporting by Nick Olivari; Editing by James
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