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Monday May 19, 2008 - 20:48:33 GMT
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FOREX NEWS-Dollar rebounds as economic slump seen near bottom


Mon May 19, 2008 4:30pm EDT

(Recasts, updates prices, changes byline)

* Leading indicators data suggests U.S. avoiding recession

* Market increasingly sees an end to Fed rate cuts

* German sentiment surveys eyed for clues on ECB rates

By Lucia Mutikani

NEW YORK, May 19 (Reuters) - The dollar rebounded from a 2-1/2 week low versus the euro on Monday after a key forecasting gauge unexpectedly rose in April, suggesting that a sharp economic downturn in the U.S. might be nearing a bottom.

That eased fears about sagging consumer confidence and reassured investors that the Federal Reserve would have room to hike interest rates later this year should record high oil prices put upward pressure on inflation.

The Fed's aggressive interest rates cuts to ward off a recession have undermined the dollar's appeal to foreign investors seeking higher returns in favor of the euro and other high-yielding currencies.

"It was in part the leading indicators report and also some technical reaction," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

"There was an attitude in the market that they were willing to buy dollars, given a sufficient catalyst and the problem is we have not seen any positive U.S. data recently. (But) we had mildly positive leading economic indicators support today."

The euro dropped to a session low of $1.5487 <EUR=>, surrendering overnight gains that had hoisted it to a 2-1/2 week high of $1.5632. It was last quoted at $1.5505, down 0.4 percent on the day.

The dollar pushed to intraday peaks of 104.69 yen <JPY=> and 1.0572 Swiss francs <CHF=> as investors cheered news that the private Conference Board's Leading Economic Indicators index rose 0.1 percent after a matching increase in March.

Economists had expected a flat reading in April after the March rise, which had followed five straight months of declines.


Analysts said the data showed a weak U.S. economy, but one that had probably sidestepped a recession, pointing out that the details of the report could be consistent with a bottoming in the economic cycle.

"We need probably one or two more months of the stock market at or near the top of the leading economic indicator report for us to be assured that we are seeing a bottom here. But the reaction to that was dollar favorable," said Woolfolk.

Traders also attributed the dollar's rebound to position squaring after last Friday's sharp sell-off, sparked by a report showing a sharp drop in consumer confidence to a 28-year low in May.

"The dollar's sell-off on Friday was a bit overdone, and now there's a growing view that the Fed's minutes this week will drive home the point that it is done cutting rates," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"The concern among central bankers now is that inflation is starting to rear its head."

After cutting its benchmark interest rate to 2 percent in April, the Fed hinted that it may pause an easing campaign that began in mid-September, when the rate stood at 5.25 percent.

Minutes from that April meeting are due on Wednesday, and investors will look for additional confirmation that the Fed has finally moved to the sidelines.

U.S. interest rate futures were pricing a 90 percent chance that the central bank would leave its benchmark rate steady at 2 percent in June. Prospects for a rate hike by year end were around 92 percent.

That's reassuring news for dollar bulls, on edge about oil prices that have surged to a record above $127 a barrel.

Elsewhere, the dollar was down 0.7 percent against its Canadian counterpart at C$0.9921 <CAD=>, while the Australian dollar <AUD=> scaled a 24-year peak of $0.9564, boosted by firm commodity prices, before easing to $0.9533.

Analysts said inflation worries would keep the market focused on U.S. producer price data due on Tuesday.

However, robust readings from the German ZEW and Ifo sentiment indexes due this week could boost the euro by reinforcing the case for the European Central Bank to leave rates on hold a while longer rather than cutting them.

Euro zone rates stand at 4 percent, and most analysts expect the ECB to hold them there to fend off inflation. The Bank of Japan is widely expected to keep interest rates at 0.50 percent at a two-day policy meeting that started on Monday. (Additional reporting by Steven C. Johnson; Editing by Andrea Ricci)

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