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Friday August 22, 2008 - 14:36:44 GMT
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FOREX NEWS-US dollar rebounds as oil, sterling weaken

Fri Aug 22, 2008 9:21am EDT

(ADVISORY: Please note that there is reduced FX coverage in Europe on Monday owing to a public holiday in the UK. Full European coverage will resume on Tuesday.)

* Broad U.S. dollar rally fed by fall in oil, sterling

* Sterling outlook bleak as UK economy contracts

* Markets await Fed's Bernanke at Jackson Hole Fed (Changes byline, dateline; previous LONDON, adds quotes, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 22 (Reuters) - The U.S. dollar recovered on Friday from the previous session's sharp losses, buoyed by a pullback in oil prices, stock market gains, and an ailing pound after growth data increased chances of a recession in Britain.

Oil lost ground after soaring nearly 5 percent on Thursday. It last traded below $120 per barrel CLc1, down more than one percent on the day, easing inflation risks and aiding the dollar.

Further boosting the market's dollar optimism, analysts said, was the rise in Wall Street futures after comments from influential investor Warren Buffett saying he has no bets against the greenback and that U.S. stocks are more attractive now than a year earlier. For the full story, see [ID:nN22379030].

"The dollar is getting a knee-jerk reaction to the fact that we're getting a bit of a push-up in equities. Oil and gold have also come off and helped the dollar," said Tom Fitzpatrick, global head of FX strategy at CitiFX in New York.

"The FX market continues to trade closely with commodities. Generally, every time you see an oil move, you'll see a dollar move as well," he added.

In early New York trading, the euro <EUR=> was down 0.7 percent at $1.4810, edging towards a six-month low hit earlier this week at $1.4631, according to Reuters data.

Losses in sterling also helped the dollar regain its footing, falling sharply after the UK economy posted its weakest performance since the recession of the early 1990s. Britain's second quarter gross domestic product (GDP) showed the economy ground to a halt in the three months to June, falling from a preliminary estimate of 0.2 percent rise.

The poor UK growth numbers added to an overall bleak picture of a slowing European economy after recent data showing contraction in euro zone GDP, increasing the possibility of European Central Bank and Bank of England monetary easing.

Sterling slid 1.2 percent to $1.8562 <GBP=>, while trade-weighted sterling hit its lowest since late 1996 <=GBP>.

The pound's losses helped fuel a 0.8 percent gain in the dollar versus a basket of major currencies .DXY to 76.627, not far from its 2008 peak at 77.413 hit early this week.

The dollar also rose 1.3 percent to 109.85 yen <JPY=>, recovering from a slide to 108.12 yen on Thursday and inching back towards an eight-month high of 110.66 yen touched a week ago.

FURTHER DOLLAR GAINS FAVOURED

Markets are awaiting a speech by Federal Reserve Chairman Ben Bernanke, who will talk about financial stability at an annual symposium in Jackson Hole, Wyoming later in the day, for more clues into the U.S. central bank's view on the economy and its interest rate outlook

"We have little doubt that Bernanke will continue to travel a pragmatic middle ground that acknowledges the heightened downside risks to economic growth and the considerable stress in financial markets on the one hand, and the upside risks to inflation on the other," wrote Stephen Malyon, a senior currency strategist at Scotia Capital in Toronto.

He added that while crude oil prices remain well off their highs, the latest rebound has pulled them back to the levels seen when the Federal Open Market Committee met on August 5.

"With the July numbers revealing lingering upside pressure on core inflation, we do not expect Bernanke to temper his inflation rhetoric just yet," Malyon said..

Persistent doubts about the health of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz), Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) have also reminded investors about the housing-related troubles still plaguing the United States. [ID:nLL720462]

But those financial sector fears were not having the same repercussions in financial markets as they did earlier in the year, traders said.

The dollar has soared this month as investors dumped positions they had made betting the global economy would withstand the U.S. downturn and the credit crisis by selling the euro, the Australian dollar and commodities.

Analysts said the dollar had been overdue for a reversal of its sharp gains, but it was still on the road to a medium-term recovery after a seven-year slide to record lows. (Additional reporting by Veronica Brown in London; Editing by Chizu Nomiyama)

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