Thursday January 15, 2009 - 21:53:54 GMT
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Reuters - www.reuters.com
FOREX NEWS - Dollar rallies vs euro on ECB move, bank troubles
Thu Jan 15, 2009 4:34pm EST
* Dollar up vs euro after ECB cuts rates by 50 bps
* ECB sends mixed signals over timing of next rate cut
* Dollar up vs yen; U.S. stimulus hopes lift risk appetite (Recasts, updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, Jan 15 (Reuters) - The euro traded near a five-week low against the dollar on Thursday as the European Central Bank cut interest rates and left the door open to further borrowing cost reductions in the months ahead.
The dollar, meanwhile, rose against the yen as hopes the U.S. government would give more money to troubled banks nudged some investors back into higher-risk assets such as stocks.
The ECB cut rates by a half percentage point to 2 percent Thursday, matching a record low rate, as price pressure eased and recession spread. For details, see [ID:nLF501185].
But traders sold the euro heavily after ECB President Jean-Claude Trichet's post-meeting press conference, which many said sent mixed signals about the timing of the next rate cut. Trichet signaled the next move may not come until March.
With data showing the euro zone economic outlook deteriorating rapidly, investors say the ECB will eventually have to bring borrowing costs down to around 1 percent.
"The euro continues to suffer from the view that officials in the euro zone are dragging their feet in terms of easing policy as needed," said Omer Esiner, senior market analyst at Ruesch International in Washington.
The euro hit a five-week low of $1.3028 , according to Reuters data. After failing to break below $1.30, traders said profit-taking pushed it back to $1.3145, down 0.1 percent on the day.
UBS senior currency strategist Benedikt Germanier said the ECB "will probably have to cut by half a percentage point again, so we're staying long the dollar from $1.3550 with a target of $1.28."
Fears about Citigroup's (C.N: Quote, Profile, Research, Stock Buzz) fate and news of a push by Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) for more government aid earlier added to worries about credit losses in the financial sector.
But optimism rose after Congressional Democrats announced plans for an $825 billion tax cut and spending bill that they hope will help President-elect Barack Obama boost the staggering U.S. economy. [ID:nN15520802].
That helped the dollar add 0.8 percent to 89.84 yen and boosted sterling by 0.6 percent to 1.4655. High-yield currencies also benefited, with the Australian dollar up 1 percent at $0.6652 .
Obama's inauguration next week and hopes for a big stimulus package "might be a slight positive" for risk-taking, as "it removes some uncertainty," said Meg Browne, currency strategist at Brown Brothers Harriman in New York.
But she also said the euro would have to climb above $1.33 to signal a lasting turn in sentiment.
Analysts said the euro looked like it would continue to struggle given recent weak economic data and expectations of more ECB interest rate cuts.
"On top of that, there's no doubt the ECB is behind the curve, which does not help the euro," said Jessica Hoversen, a fixed-income and currency analyst at MF Global Ltd in Chicago.
Other major central banks, including the Federal Reserve and Bank of Japan, have cut benchmark interest rates to near zero to stimulate their economies. The Bank of England has also cut rates sharply to 1.5 percent and may yet move toward zero.
Greg Salvaggio, vice president of trading at Tempus Consulting in Washington, said Trichet's comments on a possible inflation rebound in the second half of 2009 in particular seem misplaced at a time when the economy is weakening and several euro-zone countries have either seen their credit ratings cut or are at risk for future cuts.
"Markets are wondering what Trichet is saying? Is he living in a bubble? I think it tarnishes his credibility a bit. The British and the U.S. have thrown the kitchen sink at the problem, but it seems he's not willing to do what's necessary."
(Additional reporting by Wanfeng Zhou and Vivianne Rodrigues; Editing by Chizu Nomiyama)
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