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Friday August 8, 2008 - 20:23:36 GMT
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FOREX NEWS-Dollar powers ahead, breaks below 1.50 versus euro

Fri Aug 8, 2008 4:10pm EDT

* Euro dives below 1.50, 5-1/2 month low versus dollar

* Dollar has biggest daily gain vs euro in 7-1/2 years

* Euro zone economy shows signs of weakness (Adds details, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Aug 8 (Reuters) - The dollar rallied on Friday, posting its biggest one-day gain versus the euro in 7-1/2 years as the market repriced interest rate views amid signs the U.S. slowdown was spilling over to the global economy.

The greenback traded below $1.50 for the first time since February, with oil prices tumbling below $115 per barrel, adding to the euphoria.

European Central Bank President Jean-Claude Trichet's highlighting of increasing risks to euro zone growth on Thursday had left traders to conclude that monetary policy would have to become looser, analysts said.

Added to that, the Japanese government cautioned the country's economy might be in recession, and one closely watched measure of British house prices showed the biggest monthly fall on record in July.

Monetary easing in the euro area and the UK would narrow the interest rate differential with the United States, a major factor behind the dollar's unprecedented decline.

"Trichet's comments were new and unexpected by the market, said Dustin Reid, foreign exchange strategist at ABN-AMRO Bank in Chicago.

"The market in general is repricing not only the euro/dollar interest rate spread, but reassessing what other major central banks will be doing. That's the key driver for the market today."

Most major currencies, including sterling and the Swiss franc, fell 1 percent or more against the dollar, which some analysts suggest may finally be emerging from a broad downtrend that has lasted almost seven years.

EURO DIVES TO 5-1/2-MONTH LOW

The euro dived to $1.4999 <EUR=> at one point, a 5-1/2-month low and its steepest one-day drop since December 2000, according to Reuters data. It was last trading at $1.5004, down 2.1 percent on the day.

The euro is now about 10 cents below a record high of $1.6038 struck less than a month ago.

The ICE Futures US dollar index, which tracks the dollar's performance against a basket of currencies, jumped to 75.903 .DXY, its highest level since February, posting its largest daily gain since July 2002.

The dollar's rally also has been supported by a sell-off in crude oil. Prices tumbled from a peak of over $147 a barrel CLc1 last month to below $115 on Friday in New York.

Despite the continued fragility of the U.S. financial and housing sectors, the near-term technical picture for the euro and other currencies has deteriorated quickly and further declines are likely, analysts said.

"The trend for the dollar is changing quickly. We are in a situation now in which the ECB is expected to start cutting interest rates, while the Federal Reserve will have to start hiking," said Samarjit Shankar, a currency strategist at The Bank of New York Mellon in Boston.

"That, combined with the drop in oil and other commodities, is giving a big boost to the dollar. This is not just a technical move. Fundamentals are now in place to support a sustained dollar rally," he added.

The euro traded below major technical support to below its 200-day moving average at $1.5225. It has not closed below this technical level since March 2006.

"When you look at ECB rate expectations, the overnight index swap rate shows minus 30 basis points 12 months from now, for the Bank of England it's minus 50 basis points," said Benedikt Germanier, senior currency strategist at UBS in Stamford, Connecticut.

"The Fed is expected to raise 70 basis points 12 months from now."

Sterling dropped to a 17-month low around $1.9146 <GBP=>, while the dollar touched 110.37 yen <JPY=>, its highest since January.

"The dollar is, in my view, in a genuine recovery. This trend could run further than many think," said Stephen Jen, global head of currency strategy at Morgan Stanley in London.

The Russian ruble fell to its lowest level against the U.S. dollar in five-and-a-half months, posting its biggest one-day loss in more than eight years on Friday amid escalating geopolitical tensions between Russia and Georgia. (Additional reporting by Vivianne Rodrigues; Editing by Andrea Ricci)

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