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Wednesday May 7, 2008 - 11:57:40 GMT
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FOREX NEWS-Weak data drives euro lower, dollar broadly firm

Wed May 7, 2008 7:33am EDT

(Changes byline, adds quotes, updates prices)

By Veronica Brown

LONDON, May 7 (Reuters) - Weak euro zone maufacturing and retail data combined to send the euro towards 5-week lows versus the dollar on Wednesday, while the greenback garnered support after hawkish comments from a Federal Reserve official.

Euro area retail sales were much weaker than expected, falling in monthly as well as annual terms [ID:nL07774862], while German manufacturing orders unexpectedly fell by 0.6 percent in March -- underlining concerns about the slowing economy.

A run of poor economic data has pressured the single currency in recent weeks after it hit a record high above $1.60, peeling away perceptions that the euro area was insulated from the U.S. downturn.

"The euro zone retail sales were particularly disappointing, it does suggest that European consumers are slowing down. All the data suggest the outlook is deteriorating for Europe and that's consistent with downward pressure on the euro," said Teis Knuthsen, currency strategist at Danske Markets in Copenhagen.

French trade data added to the bearish picture; the single currency's second biggest economy reported a record trade deficit for March.

Still, the European Central Bank is expected to hold interest rates steady on Thursday at 4 percent, leaving the focus on the post-decision briefing by ECB president Jean Claude Trichet, who is expected to maintain a hawkish line on inflation.

The euro traded 0.6 percent down on the day at $1.5433 <EUR=>, near a five-week low hit last week at $1.5359 and around 3.5 percent off a record $1.6018 struck on April 22.

The dollar rose more than half a percent to 105.33 yen <JPY=>, nearing a two-month high around 105.70 yen touched on Friday. Against a basket of currencies the dollar firmed half a percent to 73.413 .DXY.


The dollar drew early support from a Federal Reserve official's comments that helped cement views that the U.S. central bank's cycle of aggressive interest rate cuts may be ending.

Kansas City Fed President Thomas Hoenig said late on Tuesday that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar. [ID:nN06528406]

Also boosting the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told the Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on U.S. home mortgages. [ID:nN06526869]

But some in the market said that investors may be getting too optimistic about the dollar's outlook as a rate rise by the Fed was unlikely to help the U.S. economy, given that inflation pressures have been prompted by high oil prices, rather than consumer demand.

"Interest rates at their currently low level are going to be necessary for some time, irrespective of inflation pressures to make sure that a recession or even a depression is avoided in the United States over the next 12-18 months," said Adam Myers, market strategist at Credit Suisse.

The inflationary pressures reflected in oil stayed on the boil, with U.S. crude CLc1 sitting at $121.63 a barrel, not far off Tuesday's record high at $122.73.

Further clues on the outlook for the probelmatic U.S. homes sector are expected later with the release of pending home sales figures for March at 1400 GMT.

(Reporting by Veronica Brown; Editing by Ian Jones)

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