Thursday July 31, 2008 - 11:47:42 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar falls as economy fears linger, US GDP eyed
(Refiles to remove extraneous material)
* Dollar index falls 0.1 percent to 73.231 .DXY
* Surging euro zone inflation keeps ECB rate cuts off agenda
* U.S. GDP, payrolls data awaited for clues on economy
(Changes byline, adds quotes, updates prices)
By Simon Falush
LONDON, July 31 (Reuters) - The dollar retreated from recent
one-month highs against the euro on Thursday, as lingering
doubts over the health of the U.S. economy capped upside
progress for the currency.
The euro also found support as July inflation in the euro
zone rose to a record 4.1 percent -- more than twice the
European Central Bank's 2 percent ceiling -- reinforcing a view
that interest rates are set to stay at 4.25 percent for the rest
of the year.
Market reaction was muted however as the figures were in
line with economists expectations.
"The inflation numbers are...more biased to rate increases,
although there is negative sentiment on the growth dynamic,"
said Phyllis Papadavid, currency strategist at Societe Generale.
Even though data has recently pointed to a sharply slowing
euro zone economy, ECB members Nout Wellink and Guy Quaden both
stressed the need to manage inflation expectations.
(For details of ECB comments please double click on
Threats to U.S. growth are still worrying investors despite
data showing a 9,000 gain in ADP private sector jobs in July
[ID:nN30438138], with analysts warning against euphoria before
key U.S. non-farm payrolls on Friday.
"We don't think the recent strength in the dollar will be
sustained into a long-term turnaround as the macro underpinning
is not there," SocGen's Papadavid said, adding that she expects
the euro to retest its high above $1.60 against the dollar in
"There has been a close correlation between risk aversion
dollar and we expect the dollar to suffer more when further bad
news emerges," she said.
By 1113 GMT, the euro was up 0.2 percent at $1.5612, having
hit a one-month low of $1.5518 the previous day. The dollar fell
0.15 percent against a basket of six major currencies to 73.204
The dollar gained 0.1 percent to 108.18 yen <JPY=>, not far
off a one-month peak of 108.33 yen struck the previous day.
DOLLAR TURNING HIGHER?
The dollar's fortunes started to turn up earlier in the
month as the euro zone, Japan, Australia and many other
economies show signs of losing steam nearly a year after the
credit crunch erupted.
The U.S. currency rose sharply on Wednesday, after the
unexpected rise in ADP private sector employment raised hopes
that the pace of slowing in the U.S. economy was starting to
However, the International Monetary Fund said on Wednesday
the U.S. dollar's decline has moved the currency closer to
medium-term equilibrium, but staff estimated that its value is
still somewhat on the strong side. [nN30372623]
Investors will look to second quarter U.S. GDP growth data
released at 1230 GMT for more clues on prospects for the
"The U.S. calendar today may put an end to recession talk as
U.S. 2Q GDP is expected to show growth of 2.0 percent after
consecutive quarters of 1.0 percent and lower," said Forex
Capital Markets in a note to clients.
"Although the majority of the gain will come as a result of
the fiscal stimulus plan, any improvement above the 1 percent
infusion by the government will be seen as a dollar positive."
A Reuters consensus forecast sees second quarter GDP growing
at 2 percent.
Friday's payrolls report is viewed as key because Fed
officials have indicated their discomfort with a pick-up in
inflation pressures, but persistent job losses make it difficult
for the Fed to consider lifting rates from 2.0 percent.
The expansion of emergency lending facilities by the Fed,
ECB and Swiss National Bank had briefly helped the dollar,
showing that top central banks were seeking to keep money
flowing through strained money markets and prevent a renewed
(Reporting by Simon Falush)
(Editing by Victoria Main)
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