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Tuesday August 26, 2008 - 23:02:51 GMT
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FOREX NEWS-Euro zone gloom lifts U.S. dollar to 6-month highs

Tue Aug 26, 2008 4:07pm EDT

* Euro zone economic woes push dollar index to 2008 high

* German GDP shrinks in 2nd quarter, first time since 2004

* U.S. consumer confidence boosts dollar (Updates prices, adds comments)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 26 (Reuters) - The dollar climbed to six-month highs against the euro on Tuesday, boosted by a jump in U.S. consumer confidence and expectations of euro-zone interest rate cuts as investors braced for a possible recession in the region.

The euro tumbled versus the dollar earlier following a barrage of euro zone data suggesting economic weakness has spread beyond the United States. The Ifo German business climate index in August fell more than expected to a three-year low. German gross domestic product shrank in the second quarter for the first time since 2004, while German consumer sentiment hit a five-year low.

In contrast, U.S. economic data was less bleak. Consumer confidence rose in August, while the sales of newly constructed U.S. single-family homes in July increased from an almost 17-year low in June. [ID:nN26338472]. The reports fueled further dollar buying.

"The dollar is higher versus the euro because euro zone data confirms weakness coming out of Europe and an overall global slowdown," said Kevin Chau, a currency strategist, at IDEAglobal in New York. "The U.S. economy is still fairly weak but the rest of the world is catching up with it."

In late afternoon trading, the euro <EUR=> was down 0.7 percent at $1.4642 after falling to a low of $1.4570 following the Ifo data, its weakest since mid-February.

The euro was down more than 6 percent so far this month and looks set for its largest monthly fall since its 1999 launch.

The overnight index swaps market, meanwhile, has priced in about 46 basis points of rate cuts by the European Central Bank over the next year, analysts said, and investors could factor another 75 basis points of easing in the coming weeks. ECB interest rates are currently at 4.25 percent.

WEAK U.S. OUTLOOK, PERSISTENT INFLATION

Currency investors took little notice of the Federal Reserve's minutes of its last meeting, which earlier this month saw a weakening economic outlook and financial market stress. The Fed said the outlook supported the case for steady U.S. interest rates despite persistent inflation concerns. For the story, see [ID:nN26361420].

"The minutes appear to suggest that there is enough risk on both sides that the FOMC is likely to remain on hold for the balance of the year -- barring another financial calamity," said Dustin Reid, senior currency strategist, at ABN Amro.

But he cited the narrowing interest rate spreads between the United States and other major economies as the Fed prepares the market for a likely interest rate hike this year or next. That, Reid said, should affirm the dollar's continued strength.

The dollar index .DXY rose to a 2008 high of 77.619, and last traded at 77.225, up about 0.6 percent on the day. The U.S. currency also rose 0.4 percent to 1.0996 Swiss francs <CHF=> as other currencies tracked the euro lower.

The pound fell a more than two-year low against the dollar, falling as low as $1.8331 <GBP=>. It was last at $1.8386, down 0.8 percent from late Monday.

The dollar was also up 0.3 percent versus the yen at 109.61 <JPY=>.

Ongoing worries that other countries are vulnerable to U.S. economic weakness and jitters about the health of the financial services industry prompted investors to bail out of risky trades using higher-yielding currencies. That pushed the Australian dollar <AUD=> to an 11-month low of US$0.8495, before trading back up to US$0.8550, down 0.9 percent on the day.

High-yielding currencies tend to suffer when risk aversion increases, as investors unwind trades where they use low-yielding currencies to fund purchases of these assets.

The New Zealand dollar fell to within a cent of a one-year low of US$0.6818 hit earlier in the month <NZD=>. The currency came under selling pressure earlier after New Zealand posted in July its highest monthly trade deficit in 11 months. It was last at US$0.6970, down 1 percent from late on Monday. (Additional reporting by Nick Olivari; Editing by Leslie Adler)

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