FOREX NEWS-Soft sentiment data knocks euro/dlr off 1-mth high
Tue May 27, 2008 6:42am EDT
(Changes byline, adds comment, updates prices)
By Toni Vorobyova
LONDON, May 27 (Reuters) - The euro dived nearly a full U.S. cent from earlier one-month highs on Tuesday, after softer-than- expected German and French sentiment data cast a shadow over the health of the euro zone economy and made rate hikes less likely.
French business confidence slumped to a 2-1/2 year low this month [ID:nL27254574], while the forward-looking German GfK index pointed to an unexpected deterioration in consumer morale in June [ID:nL26474384].
The data cast doubts over whether the European Central Bank would contemplate raising interest rates to tame inflation this year, instead of cutting them to boost growth.
"The main reason for the reversal we have seen in euro/dollar (from one-month highs) is linked to the very poor data we've seen. The data is clearly highlighting that the justification for ECB rate hike expectations is not really there," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.
"For the euro zone/U.S. rate differential, the upside is very limited, and so far the rate differential remains the main driver of euro/dollar," he added.
The euro slipped to a session low of $1.5728 <EUR=>, pulling away from a one-month high of $1.5818 hit earlier in the session as British markets re-opened after a public holiday on Monday. U.S. traders will also return from a holiday later on Tuesday.
By 1026 GMT, the euro traded at $1.5748, down 0.2 percent on the day according to Reuters data.
ECB Governing Council member Klaus Liebscher said that recent data hint at lower euro zone growth this year and next, but added that it is too soon say inflation has peaked [nL27457207].
The Japanese yen -- which has ultra low interest rates at just 0.5 percent -- was pressured by its status as a funding currency, with relatively subdued implied FX volatility making such trades less risky and reducing the cost of options.
The euro rose to a one-month high of 163.88 yen <EURJPY=>, while the dollar added half a percent to 103.92 yen <JPY=>.
The dollar index gained 0.2 percent to 72.239 .DXY. The greenback also rose against sterling, pushing the British currency down nearly 0.3 percent to $1.9764 <GBP=>.
While an economic slowdown may be just beginning in the euro zone, in the United States some investors hope that the worst is over and the Federal Reserve's steep 325 basis points of rate cuts since September have succeeded in propping up the economy.
Others reckon there may be more trouble to come, with both camps scrutinising data for confirmation of their theories.
Tuesday's U.S. releases include the S&P/Case Shiller house price index for March at 1300 GMT followed by new home sales for April and consumer confidence for May an hour later.
"One of the most watched measures of U.S. house prices, Case Shiller, has recently been showing an acceleration in month-on-month house price declines, while $4 a gallon gasoline prices may also weigh on U.S. consumer confidence," ING said in a research note.
"Expect the dollar to remain soft running into Friday's release of core PCE, where any upside surprises could flatten the yield curve and help the dollar."
U.S. crude prices hovered around $133 per barrel CLc1, near record highs hit last week.
Investors also looked to speeches this week by Federal Reserve officials including Chairman Ben Bernanke on Thursday to provide a clearer picture of the deteriorating U.S. economy.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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