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Wednesday August 27, 2008 - 20:18:32 GMT
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FOREX NEWS-U.S. dollar slides as ECB revives rate hike talk

Wed Aug 27, 2008 4:07pm EDT

* Euro rebounds from 6-month lows versus dollar

* ECB's Weber boosts euro with hawkish rhetoric

* U.S. durable goods report better than expected (Recasts, updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 27 (Reuters) - The U.S. dollar tumbled from six-month peaks against the euro on Wednesday, as comments by a European Central bank official rekindled speculation about an interest rate increase in the euro zone to quell persistent inflation pressure.

Investors also remained wary of nagging troubles in the U.S. financial system as mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) moved back into the spotlight, leaving the dollar vulnerable in the near term.

The dollar also fell against a basket of six major currencies, retreating from this year's highs.

Comments on Wednesday by ECB Executive Board member Axel Weber, widely considered one of the most influential ECB policy-makers, fueled the dollar's freefall. Weber told Bloomberg News that any talk about lower interest rates in the euro zone was premature.

He also gave the impression that if the euro zone economy improves toward the end of the year, there might even be scope for tightening.

"Weber's comments today were quite hawkish. The ECB may subsequently change its view and it has done that in the past," said David Greenwald, chief operating officer at currency hedge fund TG Capital in Costa Mesa, California, with assets of about $130 million.

"But to me, the ECB's core view is hawkish and its core predisposition is to raise interest rates. So it's very hard for me to see a straight line move in the dollar " he added.

In late afternoon trading, the euro was up 0.5 percent on the day at $1.4725 <EUR=>, rallying from six-month lows at $1.4570 hit on Tuesday.

The dollar was little changed versus the yen, but had an upward bias for most of the session, buoyed by gains in the U.S. stock market after data showed an unexpected rise in new orders for long-lasting U.S. manufactured goods. It last traded at 109.59 yen <JPY=>.

Sterling was down 0.3 percent at $1.8345 <GBP=>, after earlier touching a two-year trough at $1.8286.

The British pound has dropped 9 percent from a three-month peak struck in mid-July, and is currently on track to post its worst monthly performance against the dollar since 1992.


The dollar index, a measure of the greenback's value against six major currencies, fell 0.3 percent to 77.009 .DXY, having hit a 2008 high on Tuesday at 77.619.

"Dollar sentiment is turning negative, not on fundamental factors, but as market participants focus on the risk of a longer and deeper dollar correction," said Brown Brothers Harriman in a research note.

"Technical conditions warn of a possible sharp dollar pullback with momentum indicators diverging (notably, the euro, sterling and Australian dollar). Disappointment over the lack of follow-through buying yesterday after the dollar extended gains is encouraging the negative sentiment," the bank added.

A batch of weak euro zone economic data this week had fueled expectations that the ECB's next move would be to cut rates, contributing to an 8 percent fall in the single currency against the dollar since its peak in July.

On the other hand, economists expect the Federal Reserve to raise rates, although minutes of the bank's last rate-setting meeting suggested that weak financial conditions and sluggish growth could prevent such a move.

However, analysts at Credit Suisse cautioned against reentering new short dollar positions, as European data is likely to worsen in the near term. But the bank said the "price action is supportive of our expectation that the dollar is likely to struggle...coming out of the summer."

Overall, the dollar is still expected to be broadly supported by a deteriorating global economy even as the Fed seems likely to keep rates on hold in the coming months. Central banks in the euro zone, Britain and Australia are expected to lower rates at some stage in order to shield their economies from the threat of recession. (Additional reporting by Nick Olivari; Editing by Leslie Adler)

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