FOREX NEWS-Dollar set for biggest weekly fall for 2 months
Fri May 23, 2008 6:34am EDT
(Changes byline, adds comment, updates prices)
By Toni Vorobyova
LONDON, May 23 (Reuters) - The dollar looked set for its steepest weekly fall against a basket of major currencies in two months on Friday, hit by surging oil prices and concerns that the U.S. may be entering a toxic phase of slowing growth and rising inflation.
The euro, in contrast, remained on a solid footing despite survey data showing very weak growth in the euro zone's services and manufacturing sectors. Analysts said that despite the slowdown, the economy was still robust enough to allow the European Central Bank to focus on restraining price pressures. "We had a massive shift generally in the past couple of weeks and the market now sees the ECB hiking rates," said Marcus Hettinger, FX strategist at Credit Suisse in Zurich.
"Consumers in the U.S. are already under stress from housing, and now...we have rising oil prices. Basically it means interest rates will remain low in the U.S. despite rising inflation...and that's one of the reason why the dollar will remain weak," he added.
Against a basket of six major currencies .DXY, the dollar was down nearly 1 percent since the start of the week at 72.127, heading for its biggest weekly percentage fall since late March.
The euro was steady on the day at $1.5724 <EUR=> at 0956 GMT, off a one-month high of $1.5814 touched on Thursday.
The single European currency fell half a percent to 162.85 yen <EURJPY=>, while the greenback eased to 103.58 yen <JPY=>.
"In the last weeks we have seen the yen weakening in line with stronger equity markets, (but) due to high oil prices we have a bit more risk aversion coming into the market and that's positive generally for the yen across the board as a funding currency," Hettinger said.
With rates of just 0.5 percent, the yen is often used as a source of cheap funding for riskier, higher-yielding investments and thus benefits when such trades are unwound during periods of risk aversion.
Oil rose one percent to around $132, moving back towards yesterday's record highs above $135 a barrel CLc1, while European equity markets weakened .
A flash reading of the RBS/NTC's euro zone services Puchasing Managers Index (PMI) came in at 50.6 in May, sliding from 52.0 in April and lower than expectations for a 51.7 reading. The manufacturing index eased to 50.7, in line with forecasts, leaving both gauges in sight of the 50 mark between growth and contraction.
"The overall worse-than-expected results...confirm that the underlying growth trend in the euro zone economy is firmly down and that growth in the second quarter indeed will be less flattering," ING said in a note.
"However, the activity data are not yet weak enough to dilute the ECB's concerns about the medium-term inflation outlook, which is the primary factor driving its monetary policy decisions."
Further clues on the health of the U.S. economy will come from existing home sales data for April at 1400 GMT which are expected to show further weakening.
Earlier this week, the Federal Reserve downgraded its 2008 U.S. economic growth forecast and raised its inflation outlook.
The Fed has cut interest rates to 2 percent from 5.25 percent since September, but markets now expect the central bank to hold steady and possibly raise rates by the end of the year.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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