Thursday June 26, 2008 - 19:48:05 GMT
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Reuters - www.reuters.com
FOREX NEWS - Dollar falls broadly on Fed outlook, stocks
* Dollar broadly weaker on Fed outlook, stocks' slide
* Euro surges as markets brace for ECB to hike in July
* Euro notches record high vs battered yen
(Corrects that Kathy Lien is chief strategist at DailyFX.com,
not Forex.com, 8th paragraph)
(Updates prices, adds comment)
By Steven C. Johnson
NEW YORK, June 26 (Reuters) - The dollar fell broadly on
Thursday, nearing a three-week low against the euro, after the
Federal Reserve held interest rates at 2 percent, dashing
expectations of an imminent rate hike.
While the Fed said inflation risks had increased, it did
not use language that convinced markets a rate hike was likely
at its next policy meeting in August.
The European Central Bank, however, has repeatedly said it
may lift rates in July to fight inflation, helping to push the
euro near a three-week high at $1.5750 <EUR=> before it eased
to $1.5736, up 0.4 percent from late Wednesday.
"The dollar is on the ropes and has further to fall unless
the Fed can correct the market perception that U.S. rates are
on hold indefinitely," said Michael Woolfolk, senior currency
strategist at The Bank of New York Mellon.
With the ECB "clearly focused on inflation and willing to
sacrifice growth to keep it at bay," he said the euro is likely
to break its all-time record above $1.60 near term.
Fresh concern about the U.S. banking sector and a sharp
slide in U.S. stocks also weighed on the greenback, sending it
down 0.6 percent to 107.14 yen <JPY=>, a session low.
Fitch Ratings' downgrade of General Motors (GM.N: Quote, Profile, Research, Stock Buzz) and
Chrysler LLC's CBS.UL credit ratings also hit the dollar, as
did the Dow's drop to its lowest level since October 2006.
"The market was already bearish dollars following the FOMC
rate decision," said Kathy Lien, chief strategist at
DailyFX.com in New York. "Today's breakdown in U.S. stocks and
mixed economic data has sent it even lower."
Elsewhere, sterling rose 0.7 percent to $1.9880 <GBP=>,
near an eight-week high of $1.9896 earlier in the session.
The euro also climbed to a record high at 169.45 yen
<EURJPY=> before easing to 168.78 yen. The Japanese currency
has been hurt by expectations that the Bank of Japan will keep
interest rates at a low 0.5 percent for a while due to weakness
in the domestic economy.
WISHING AWAY INFLATION
The U.S. central bank's move to leave interest rates
unchanged on Wednesday effectively ended one of its most
aggressive rate-cutting campaigns, launched last September to
curb economic fallout from the housing and credit crisis.
Rising inflation expectations now have many investors
worried that the Fed is falling behind the curve.
Oil prices on Thursday shot up more than $3 to above $138 a
"Wishing away inflation is not a prudent policy move if you
are a central banker, and we fear the Fed is going to run afoul
of its dual mandate, which includes price stability," Woolfolk
Expectations for a July ECB rate hike remained intact after
data from German states pointed to an increase in inflation in
the euro zone's biggest economy.
"The market is dealing in hard facts and the ECB is very
likely to be raising rates next week and probably still
sounding pretty hawkish even after they've hiked," said Chris
Turner, head of FX strategy at ING in London.
Woolfolk said a report showing the U.S. economy grew at an
annualized rate of 1 percent in the first quarter, nearly
double the annualized growth rate of 0.6 percent in the final
three months of 2007, was more encouraging.
"That's about the best that could have been wished for, and
it shows that net exports clearly contributed, but there are
obviously still strong downdrafts in the banking and housing
sectors," he said.
(Additional reporting by Michael Taylor in London; Editing by
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