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Thursday August 7, 2008 - 10:14:48 GMT
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FOREX NEWS-Dollar slips on profit-taking ahead of ECB, BoE

Thu Aug 7, 2008 4:09am EDT

(Recasts, adds comment and quotes, updates prices, changes byline and dateline. Previous: TOKYO)

* Dollar slips back on profit-taking as oil stems slide

* ECB and BoE both seen keeping rates on hold

* ECB's Trichet awaited for clues on policy

By Jamie McGeever

LONDON, Aug 7 (Reuters) - The dollar weakened broadly on Thursday as dealers took profit from its recent gains ahead of two major interest rate decisions in Europe, and as oil prices stemmed their recent slide to three-month lows.

The European Central Bank and Bank of England are widely expected to keep rates on hold, at 4.25 percent and 5 percent respectively, leaving the market's focus on ECB President Jean-Claude Trichet's press conference for clues on what policy over the coming months might be.

Rebounding global stocks, a near-$30 fall in oil prices, cautious optimism surrounding the outlook for the U.S. financial sector and a broadly growth-supportive tone from the Federal Reserve this week as it kept rates on hold have boosted the dollar recently.

The rally culminated in a seven-month peak against the yen and a near two-month high against a basket of major currencies on Wednesday.

But traders took profits and trimmed positions on Thursday ahead of the ECB and BoE decisions as they pondered whether the dollar's rally was possibly overdone.

"The dollar move is possibly becoming a bit excessive relative to the optimism in the market to what we think is the reality," said Derek Halpenny, head of global currency strategy at BTM-UFJ in London.

"An imminent downturn in the (U.S.) economy is coming again."

At 0755 GMT the euro was up a third of a percent on the day at $1.5465 <EUR=>, having dipped below $1.54 in Asian trade overnight for the first time in almost two months.

Traders said a large Asian central bank was a notable buyer of euros from these lows.

The dollar slipped around a quarter percent against the yen to 109.40 yen <JPY=>. It had hit a seven-month high of 109.89 yen on trading platform EBS the previous day.

The dollar index, a measure of the greenback's value against a basket of six currencies, was down a third of a percent at 74.045 .DXY. The index closed above the 200-day moving average on Wednesday for the first time since April 2006 but is trading just below it now.


The focus for currency traders on Thursday will be Trichet's press conference at 1230 GMT.

Financial markets are betting the bank will leave rates unchanged for the rest of the year although they're still leaning toward a 40 percent chance of a hike in the coming months.

Like many central banks, the ECB is caught between slowing growth and sticky inflation, even though oil fell as low as $117.11 a barrel on Wednesday, around $30 off its July peak.

Analysts said cautious remarks about the euro zone economy from Trichet would impact the euro more and bring the currency lower, while the ECB chief is expected to growl again at record inflation in the region and keep a neutral stance on monetary policy. [ID:nL6277304]

Halpenny at BTM-UFJ reckons Trichet has no choice but to acknowledge the "clear deterioration" in euro zone economic data since the ECB raised rates a quarter percentage points at its meeting last month.

But the ECB chief will not want the market to think the central bank is about to ease policy only a month after tightening, and will keep up the anti-inflation rhetoric.

"We still expect to see the dollar strengthen in the medium term but recent gains appear overdone," currency strategists at UBS said in a note.

"We went long euro/dollar as a short-term tactical trade recommendation ahead of today's meeting as the ECB may prove to be less dovish than expected."

Even if the euro does regain more ground, it still looks on track to record its fourth consecutive weekly decline, for the first time since May/June last year, Reuters charts show.

Meanwhile, the BoE is expected to keep rates on hold at 5 percent as it is caught between strong inflationary pressures and the need to guard against deteriorating growth, like many other major central banks. [ID:nL6476605]

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