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Wednesday April 16, 2008 - 21:14:34 GMT
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Forex Research - Carry Trades Hold Strong, But Stale Price Action Could See A Shake Up Tomorrow

Wed Apr 16, 2008 4:21pm EDT

(Updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 16 (Reuters) - The dollar plummeted to lifetime lows against the euro on Wednesday, as a steep decline in U.S. home construction and record high euro zone inflation underscored the contrasting growth paths of the two economies.

The euro rose to $1.5977 <EUR=> against the dollar, according to Reuters data, its strongest since its 1999 launch, as data showing a record 3.6 percent advance in euro zone prices last month suggested the European Central Bank won't cut interest rates soon. The euro zone single currency also posted its largest daily increase in three weeks.

In contrast, U.S. benchmark interest rates are still seen headed lower, especially after reports showed a sharp slide in March housing starts and an unexpectedly tame core inflation reading, stripping out volatile food and energy costs. For more, see [ID:nN16322404] [ID:nN16324181].

"The divergence of monetary policy between the euro zone and the U.S. is continuing to fuel the euro/dollar's rally," said Omer Esiner, a market analyst at Ruesch International in Washington.

The Federal Reserve -- the U.S. central bank -- has already cut interest rates by 3 percentage points since September and is widely expected to cut them again, to at least 2 percent, in late April. Meanwhile, euro zone interest rates have been at 4 percent for more than a year.

In late afternoon trade, the euro rose 1 percent to $1.5956 while sterling rose 0.4 percent to $1.9709 <GBP=>.

Ruesch's Esiner said despite the euro's rally, the currency seems to be losing momentum. "I do get the sense that we're starting to top out a little bit. I would bet that $1.61-$1.62 is definitely in play, but after that, the euro is going to run out of steam."

The greenback was changing hands at 101.71 Japanese yen <JPY=>, off a session low of 100.83 yen, but still down 0.1 percent on the day.

It also fell 0.8 percent to 0.9988 Swiss franc <CHF=> and weakened more than 1 percent against the Canadian <CAD=> and Australian <AUD=> dollars.

Data showing an 11.9 percent plunge in housing starts last month, while just the latest in a steady stream of bleak U.S. housing data, still managed to shatter the guarded optimism that had been growing in markets of late, traders said.

The dollar also didn't get much support from the Fed's anecdotal Beige Book summary of regional conditions, which said the economy is weakening across much of the United States even as food, fuel, and raw materials prices are rising.

"Beige Book headlines are suitably soft with the tenor almost exactly as you would expect for an economy where domestic demand is probably running negative and only net exports provides hope for a small positive GDP number for the quarter," said Alan Ruskin, chief international strategist, at RBS Greenwich Capital, referring to Gross Domestic Product, a broad measure of output of goods and services.

Investors are also monitoring U.S. first-quarter earnings results, although the outcome so far has been mixed.

Earlier, JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), the third-largest U.S. bank, said its quarterly profit fell 50 percent in the first three months of the year, while The Wall Street Journal reported Merrill Lynch (MER.N: Quote, Profile, Research) will post $6 billion to $8 billion in write-downs when it releases results on Thursday. [ID:nL16709272].

But U.S. stocks rallied to close more than 2 percent higher on Wednesday as investors were encouraged by earnings from Intel Corp. (INTC.O: Quote, Profile, Research) and IBM (IBM.N: Quote, Profile, Research). (Editing by James Dalgleish)

© 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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