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Monday August 11, 2008 - 20:56:57 GMT
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FOREX NEWS-Dollar extends rally vs euro on growth outlook

 

Mon Aug 11, 2008 4:32pm EDT

(Adds comments, updates prices, changes byline)

* Euro falls to 5-1/2-month low vs dollar

* Falling oil prices continue to boost sentiment

* Dollar may be entering sustained long-term recovery

By Wanfeng Zhou

NEW YORK, Aug 11 (Reuters) - The U.S. dollar rallied to a five-and-a-half month high against the euro on Monday, boosted by another drop in crude oil prices and speculation that the slowdown blighting the U.S. economy was spreading worldwide.

The euro, which last week suffered its biggest weekly fall since its 1999 inception, briefly fell below the $1.49 level on Monday. Mounting signs of economic difficulties in Europe, Asia and Australia have diminished prospects of higher interest rates outside the United States, bolstering demand for the dollar.

"The U.S. economy led the way into this downturn, starting well over a year ago, and now the ripple effects are starting to hit these other economies," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"If you take it back a month ago, the Bank of England was supposed to tighten rates, the European Central Bank was going to tighten rates," Dolan said. "One month later, we're looking at a 180-degree view change and that's why you're seeing this very sudden unraveling of all these trades."

Declining oil prices helped ease worries about the impact of higher energy costs on the U.S. economy and also helped boost demand for the greenback.

In late trading in New York, the euro was 0.7 percent lower on the day at $1.4904 <EUR=>, after hitting $1.4881, the currency's lowest trading level since Feb. 26, according to Reuters data.

The dollar index, a measure of the greenback's value against a basket of six currencies .DXY, was trading 0.1 percent higher at 76.262.

LONG-TERM RECOVERY

The dollar's recent sharp move higher is part of the first leg up in a multiyear uptrend, said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

"The technical damage has been done and we believe the single currency has now finished carving out a top against the U.S. dollar," he wrote in a note.

But in the near term, Gareth Sylvester, senior currency strategist at HIFX in San Francisco, cautioned that the currency may see some consolidation before resuming an upward trend.

"The move (dollar's sharp rally) is certainly over exaggerated," he said. "On all the majors, we may well see some small corrections."

The euro briefly recouped some of its losses earlier after European Central Bank council member Klaus Liebscher warned that policy-makers remained focused on taming high inflation.

Liebscher told Market News International that inflation risks remained to the upside in the medium term and that there is no room for "complacency" on euro zone interest rates and inflation. For details, see [ID:nLB694051]

Other analysts said hawkish comments such as Klaus Liebscher's remarks follow a routine observed in June and July when ECB officials corrected rate expectations.

ECB President Jean-Claude Trichet's observation last week that the euro-zone economy was facing tough times confirmed that the rest of the world is not immune to the economic pain the United States is enduring.

The ECB held rates at 4.25 percent on Aug. 7 after raising them to a near seven-year high in July, but markets have written off the chance of further tightening this year as growth slows.

Oil prices seesawed and traded as high as $116.90 a barrel CLc1 on Monday amid heightened tensions between oil-exporting giant Russia and former Soviet state Georgia. Still, crude resumed declines and was last trading lower 0.7 percent lower at $114.56.

Demand for the Swiss franc rose on news of the fighting between Russia and Georgia. The franc traded near a three-week high of 1.6201 to the euro <EURCHF=>. (Additional reporting by Vivianne Rodrigues; editing by Gary Crosse)

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