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Thursday October 2, 2008 - 20:28:38 GMT
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FOREX NEWS-Dollar soars vs euro as Trichet signals rate cut

Thu Oct 2, 2008 4:20pm EDT

* Dollar surges vs euro, ECB signals rate cut

* Euro tumbles to near 13-month trough vs dollar

* Trichet says rate cut discussed, inflation ebbing (Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Oct 2 (Reuters) - The U.S. dollar surged to a near 13-month peak versus the euro on Thursday after the European Central Bank signaled it was ready for its first rate cut in five years as growth slows and price pressures abate.

ECB President Jean-Claude Trichet told a news conference the policy-making Governing Council had even discussed cutting interest rates at Thursday's meeting, driving the euro down to $1.3746, its lowest since September 2007, according to Reuters data.

The bank left its benchmark rate steady at 4.25 percent but Trichet's remarks that a cut had been discussed left investors betting monetary policy easing could come as soon as November.

That would help narrow the interest rate differential between the euro and the dollar, and possibly sustain the U.S. currency's rally into year-end, analysts said. The Federal Reserve's key overnight lending rate stands at 2.0 percent.

"The comments from Trichet, basically signaling that the ECB held a vote on whether to lower interest rates and the euro zone economies are poised to decline significantly ... are promoting a lower euro," said Greg Salvaggio, vice president of trading at Tempus Consulting in New York.

In late New York trading the euro was down 1.6 percent at $1.3795 <EUR=>.

Salvaggio said the euro zone single currency was also being weighed down by investors scrambling to put dollars back on their balance sheets.

"Large institutions, hedge funds, mutual funds, pension funds and European banks still need dollars for financing so they are using the currency market as an avenue to obtain that financing," he said.

"They are selling euros, pounds, really any liquid assets they have, hence the reason why the price of oil is down where it is, on a basis to accumulate dollars back on their balance sheets."


The euro's sharp decline hoisted the ICE Futures U.S. dollar index to a near 13-month high around 80.794 .DXY, according to Reuters data. The index, which measures the dollar's value against a basket of six currencies was last up 1.1 percent at 80.562.

While the dollar has been cheered by progress in the government's $700 billion financial sector bailout plan, analysts warned final approval by the House of Representatives could see an unwinding of some the dollar's safe-haven bid.

U.S. House Financial Services Committee Chairman Barney Frank told CNN television the bill was more likely to pass in the House, but the outcome was still uncertain. The House will probably vote on Friday. To read more click on [ID:nSP164112].

Against the yen, the dollar fell 0.5 percent to 105.24 yen <JPY=>. The euro slumped to a more than two-year low of 144.85 yen <EURJPY=>, according to Reuters data, and was last trading a round 145.12 yen, down 2.1 percent on the day.

Despite being at the epicenter of the financial crisis, the dollar has surged this week after a number of European banks had to be bailed out -- underscoring the international nature of the crisis and hitting the euro and pound.

Banks have been scrambling to buy the greenback on the open market because they have been shut out from borrowing funds in frozen interbank money markets, further supporting the dollar.

Analysts see the dollar riding out an expected big drop in September nonfarm payrolls on Friday, with the focus remaining on the financial crisis and Europe's darkening growth outlook.

"If we see a worse-than-expected number, we could see a bit of a pull back in the dollar, but I don't think the impact of the report is going to be long lasting," said Dustin Reid, foreign exchange strategist at ABN AMRO Bank in Chicago.

Economists expect the Labor Department's employment report to show U.S. employers eliminated 100,000 jobs from their payrolls after the 84,000 shed in August, according to a Reuters survey. It would be the ninth straight month of falls.

News that British house prices recorded their biggest annual drop in 17 years in September, while construction shrank for a seventh straight month, helped to drag sterling briefly below $1.7600 against the dollar. The pound was last down 0.5 percent at $1.7617 <GBP=>. (Additional reporting by Nick Olivari; Editing by James Dalgleish)

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