FOREX NEWS-US inflation, growth worries keep dlr under pressure
Mon May 19, 2008 6:41am EDT
(Changes byline, updates prices, adds quotes)
By Toni Vorobyova
LONDON, May 19 (Reuters) - The dollar slipped to a 2-1/2 week low against a basket of major currencies on Monday, as the worst U.S. consumer confidence reading in nearly three decades raised concerns about stagflation.
The May Reuters/University of Michigan index of U.S. consumer confidence dropped to 59.5 on Friday, the lowest level since June 1980, while short-term inflation expectations surged to their highest in a quarter of a century [ID:nN16406494].
In contrast, analysts said that there was scope for relatively robust readings from key German sentiment surveys this week to support the euro by reinforcing the case for the European Central Bank to leave rates on hold a while longer rather than cutting them.
"For now it looks as though markets are going to continue to press the (euro's) top up towards $1.5650... but I don't think we are really going to have the momentum to break out of the current ranges," said Jeremy Stretch, strategist at Rabobank.
"Investors might be buying into the idea that the German data -- ZEW and Ifo later this week -- might be a little bit on the firmer side of expectations," Stretch said.
"And at the same time there's increasing nervousness about the inflation picture in the U.S. ... if growth remains weak and inflation is elevated then that's not a particularly comfortable place to be," he added.
The euro rose to its highest level since May 1 at $1.5632, according to Reuters data <EUR=>, before paring gains to stand at $1.5588 by 1018 GMT.
The dollar also fell as low as 72.552 against a basket of major currencies .DXY, its weakest in over two weeks.
The yen edged up to 103.92 per dollar <JPY=>.
The Australian dollar scaled a 24-year peak of $0.9564 <AUD=>, boosted by firm commodity prices, better risk appetite and expectations that domestic interest rates will stay high.
The surprisingly steep fall in U.S. consumer confidence slightly tempered market expectations for the Federal Reserve to raise interest rates later in the year. FEDWATCH
U.S. short-term interest rate futures show a roughly 80 to 85 percent chance of the Fed raising rates by 0.25 percentage point to 2.25 percent by year-end. They had been fully pricing in such an increase before the consumer confidence data.
Investors will look for more clues on the outlook for U.S. monetary policy from minutes of the Federal Open Market Committee that will be released on Wednesday.
The Bank of Japan is widely expected to keep interest rates at 0.50 percent at a two-day policy meeting that starts on Monday. [ID:nT305710]
The European Central Bank's rate decision is due next week, and most analysts expect inflation worries will keep it hawkish as long as economic data holds up reasonably well.
German ZEW economic sentiment data on Tuesday, the Ifo index of German business sentiment on Wednesday and euro zone services and manufacturing PMI data on Friday.
"ZEW survey may edge higher given it is a poll of investment professionals where sentiment has likely improved alongside greater market stability, and also in the wake of Germany's impressive Q1 GDP growth," Calyon said in a note to clients.
"The greater test for euro bulls though will come later in the week when softer readings on the PMI estimates and a lower German Ifo point to a moderation in activity entering Q2." (Editing by David Christian-Edwards)
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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