Tuesday December 16, 2008 - 12:02:13 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro dips vs dlr but limited before Fed
* Euro slips but losses limited before Fed rate decision
* Fed seen cutting rates near zero, focus on more steps
* Euro dn 0.4 pct vs dlr after 2-mth high of $1.3739 <EUR=>
* Euro zone PMIs fall to new records; UK CPI slows less
By Tamawa Desai
(Recasts, adds quotes, updates prices)
LONDON, Dec 16 (Reuters) - The euro eased from a two-month
high against the dollar on Tuesday but losses were limited on
expectations the U.S. Federal Reserve will cut interest rates to
near zero and take more steps to battle recession.
The euro extended losses after purchasing managers' surveys
released on Tuesday showed a bleak outlook for the region's
The single European currency had surged against the dollar
since Monday as repatriation flows into the dollar ebbed and as
market players covered positions ahead of the year end.
"The data reminded markets a bit that the euro zone economy
is not in great shape," said Daragh Maher, strategist at Calyon
He added, however, "the euro's losses are relatively modest
in the context of its recent sharp gains against the dollar."
At 1122 GMT, the euro was down 0.4 percent on the day
against the dollar <EUR=> at $1.3653 after hitting a two-month
high of $1.3739 in Asian trade earlier.
A failure to break above a previous high near $1.3780
prompted players to take profits, dealers added.
Data on Tuesday showed euro zone manufacturing and services
activity sank to new lows in December, although less than
The flash estimate of the Markit Purchasing Managers Index
for manufacturing fell to 34.5 compared to 35.6 in November.
That was slightly above a forecast of 34.3 but left the index way
below the 50 level which separates expansion from contraction
The euro also dropped 1.2 percent to 122.81 yen <EURJPY=>.
MORE RADICAL STEPS FROM THE FED?
But traders were wary of taking on big positions until they
see the outcome of the Fed's two-day policy-setting meeting
later in the day.
The U.S. central bank is widely expected to cut its key
federal funds rate target by at least a half percentage point to
an unprecedented 0.50 percent, but futures markets are pricing
in a 62 percent probability of a bigger 75 basis point easing
Moreover, investors will focus on an accompanying statement
for clues on whether the Fed will clearly state it will deploy
so-called quantitative easing to restore growth [nLG548641].
Any acknowledgment that the Fed is moving towards a
quantitative easing approach by buying up government debt "could
sour dollar sentiment in the near term," BTM-UFJ currency
economist Lee Hardman said.
Fed Chairman Ben Bernanke said earlier this month that the
central bank could purchase long-term securities issued by the
Treasury or government-sponsored agencies to cut yields and
Against a basket of currencies, the dollar .DXY rose 0.1
percent to 82.209 as it edged off a two-month low of 81.875. The
U.S. unit fell 0.8 percent against the yen <JPY=> to 89.98 yen.
Traders are also keeping an eye on U.S. consumer price and
housing sector data before the Fed's decision.
U.S. consumer prices overall are expected to have fallen 1.2
percent in November after a 1.0 percent decline in the previous
month. Excluding volatile food and energy prices, consumer
prices likely rose 0.1 percent.
Separately, data showed British inflation slowed less than
expected in November but is still forecast to fall sharply soon
because of a cut in sales tax and tumbling fuel prices.
The Office for National Statistics said consumer prices fell
0.1 percent last month to bring the annual rate down to 4.1
percent from 4.5 percent in October. That was the lowest rate
since June but still well above the government's two percent
In a letter to the government explaining why prices were
rising by more than double the official target, Bank of England
Governor Mervyn King said on Tuesday that UK inflation could
fall below one percent next year.
King also said a fall in sterling and market interest rates
should support the outlook for activity and inflation
[nBOE001667]. Sterling was down 0.4 percent at $1.5250 <GBP=>.
(Additional reporting by Jessica Mortimer; Editing by Victoria
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