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Thursday May 8, 2008 - 09:24:01 GMT
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FOREX NEWS-Euro hits 2-mth low vs dollar; ECB, Trichet eyed

Thu May 8, 2008 4:41am EDT

(Changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, May 8 (Reuters) - The euro hit a two-month low against the dollar on Thursday, hurt by a report that U.S. and European officials want the dollar to strengthen, as markets awaited a European Central Bank rate decision and statement.

The yen jumped, pushing the dollar and the euro more than one percent lower as sagging stock markets encouraged the unwinding of carry trades.

The dollar hit a two-month high against a basket of major currencies as a Financial Times report said the United States and Europe now have a united desire to see the dollar strengthen against the euro, citing officials on both sides of the Atlantic [nT351863].

The single currency has been on the back foot in recent weeks after hitting a record high of $1.6018 on April 22 as poor economic data has started to eat away at a perception of a resilient euro area economy.

Mitul Kotecha, head of global foreign exchange research at Calyon, said the FT report had placed limits on the dollar's weakness.

"I think the big surprise in the story is that we know that European officials are happy with a firmer dollar but the fact that there is explicit comment saying U.S. officials are happy with the dollar's rebound is perhaps the reason markets have reacted as much," he said.

"Until now it seems to be an open door policy for dollar weakness but clearly there are limits," he added.

The ECB faces a policy poser in the current climate of sky-high food and oil prices and slowing growth as the currency zone is proving vulnerable to fallout from the ongoing global credit crisis.

With this in mind, even though interest rates are expected to be left on hold at 4 percent after the ECB meets later on Thursday, markets will be scrutinising every word from ECB president Jean-Claude Trichet's post-decision news briefing at 1230 GMT.

"Trichet will still need to strike a hawkish tone. Nevertheless the central bank will not want to be perceived as neglecting growth and we expect Trichet will also place a far greater emphasis on downside risks to the economy," UBS strategists said in a note to clients.

The euro fell to $1.5287 <EUR=>, its lowest since March 11 and down 4.5 percent from April's record high. The dollar was up 0.18 percent against a basket of six major currencies at 73.658, having earlier hit a two-month high at 73.895 .DXY.

The yen rose broadly as stock markets fell, with the euro falling 1.17 percent to 159.19 yen <EURJPY=>, while the dollar lost around 1 percent, before trimming losses to stand at 103.85 yen, down 0.7 percent <JPY=>.


A sharp drop in euro zone retail sales and weaker than expected manufacturing data on Wednesday combined to raise worries about the region's economic outlook further and revived expectations for eventual rate cuts.

While the ECB was widely seen standing pat, dealers said calls from a minority of analysts for a rate cut in Britain from the Bank of England on Thursday were growing.

Economic data in Britain has reflected a sharply slowing economy, with house prices slipping rapidly.

Most economists polled by Reuters expect interest rates to stay on hold at 5 percent after the BoE's policy meeting at 1100 GMT, while 40 of 65 predict a cut will come in June [BOE/INT]. However a surprise cut on Thursday can't be ruled out.

"The timing of the move seems to be the issue here. We're looking for no change, but it seems that there is a growing minority expecting a cut today," Calyon's Kotecha said.

Elsewhere, the New Zealand dollar slid more than 1 percent versus the U.S. dollar <NZD=> after data showing the country's biggest quarterly employment drop in 20 years stoked expectations for its central bank to start cutting rates later in the year. [nWEL1952]

(Reporting by Veronica Brown; Editing by Gerrard Raven)

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