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Monday June 30, 2008 - 11:08:55 GMT
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FOREX NEWS-Dollar on the backfoot as stocks falter, oil rises

Mon Jun 30, 2008 7:03am EDT

* Euro up 0.1 pct at $1.5817 <EUR=>, near earlier 3-wk high

* Record high euro zone inflation cements rate hike views

* Inflationary pressures highlighted as oil tops $143

* Increased risk aversion benefits yen, Swissie

By Veronica Brown

LONDON, June 30 (Reuters) - The dollar fell to a one-month low against a basket of major currencies on Monday, feeling the pinch of increased risk aversion, record high oil prices and an unfavourable interest rate outlook compared with the euro zone.

Battered stocks and worries over the credit crunch scaled back expectations for how soon the Federal Reserve could boost interest rates after holding them at 2 percent last week.

In contrast, the euro has benefited from widespread expectations of a European Central Bank rate increase to 4.25 percent -- backed up by data showing annual euro zone inflation hitting a record high of 4 percent in June.

Global inflationary pressures were highlighted as oil prices vaulted $143 to a record high CLc1.

"We're still seeing a bit of a spill-over from the Federal Reserve meeting last week, and its failure to signal more decisively that it was set to hike rates has kept the dollar under general downward pressure," said Robert Minikin, senior FX strategist at Standard Chartered.

"What's also noticeable is that we have very much a risk aversion dynamic -- equities have come down and yen crosses are all responding," he added.

The euro rose to a three-week high of $1.5836 <EUR=>, with analysts saying that a break of technical resistance around the $1.5850 mark could open the door for a move above April's record highs around $1.6020.

The dollar also hit three week lows at 105.00 yen <JPY=> according to Reuters data, a two-month low of 1.0131 Swiss francs <CHF=> and set a one-month trough of 72.041 versus a trade-weighted basket of six major currencies .DXY.

The dollar came under additional pressure after U.S. financial shares fell on Friday on worries about more credit losses. Lehman Brothers forecast Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) would write down another $5.4 billion in the second quarter, while Moody's said it may cut Morgan Stanley's (MS.N: Quote, Profile, Research, Stock Buzz) credit rating.

With Friday's fall, the Dow Jones industrial average .DJI was down 14.5 percent for the year, and was more than 20 percent below its October 2007 peak at one point, meeting a traditional definition of a bear market.

European stocks also followed the bear trend on Monday, falling 0.3 percent on the day .


A flash estimate of euro zone inflation for June showed that consumer prices jumped to a record high of 4.0 percent year-on-year, more than double the ECB's 2 percent target.

Analysts said the data would go further towards hardening the euro area central bank's resolve to hike interest rates when it meets later this week, with some seeing risks increasing for a post July tightening as well.

"The ECB fears that deteriorating inflation expectations might induce higher-than-expected wage claims, triggering a wage inflation spiral. As these pressures are likely to edge higher in the near term, risks of the ECB going beyond the expected July hike are mounting," said Clemente de Lucia at BNP Paribas.

Traders said position adjustment on the last day of the quarter and the half year accentuated market volatility.

The dollar index .DXY, which tracks the U.S. currency's performance against a basket of six currencies, is on track for its first quarterly rise in nearly two years, as a fall of 0.9 percent in June was outweighed by modest gains in April and May.

A light U.S. data calendar on Monday features the Chicago PMI at 1345 GMT, but the week's spotlight is firmly on the non-farm payrolls release on Thursday.

(Reporting by Veronica Brown; Editing by Ron Askew)

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