Friday March 20, 2009 - 20:12:39 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar caps worst week in 24 years
* Dollar rebounds but still suffers worst week since 1985
* Euro gains more than 5 percent vs dollar on week
* Euro zone industrial output falls, trimming euro gains
* ECB under pressure to follow Fed, other central banks
(Recasts, adds comment, updates prices, changes byline)
By Steven C. Johnson
NEW YORK, March 20 (Reuters) - The dollar rebounded on
Friday but still recorded its biggest weekly slide since 1985
as the Federal Reserve's plans to buy long-term government debt
stoked fear about the erosion of the U.S. currency.
The Fed shocked financial markets this week when it said it
would buy some $1 trillion of government and mortgage-backed
debt in a bid to cut interest rates and kick-start lending.
Anticipating an oversupply of dollars, traders sold the
greenback broadly. The euro hit a two-month high above $1.37 en
route to its biggest daily gain since its 1999 launch.
The dollar clawed back some of its losses on Friday, but
against a basket of currencies.DXY it still notched its
biggest weekly plunge since the 1985 Plaza Accord, when major
economies agreed to a formal depreciation of the greenback.
"I think we will look back at this week and see it as
seminal one because the Fed changed the way markets perceive
monetary policy and the dollar," said Mike Moran, senior
currency strategist at Standard Chartered Bank in New York.
But while the dollar has taken a hit, he said a severe
global recession will continue to hurt other countries and
their currencies, too. "That means we'll see a lower range for
the dollar rather than a total meltdown, which is what the
market is getting its head around today."
The euro fell 0.7 percent on Friday to $1.3563 <EUR=>,
after hitting a peak of $1.3737 on Thursday, its highest level
since early January. At current prices, the common currency was
up more than 5 percent from last Friday's $1.2922 close.
Data showing euro zone industrial output fell in January
for a fifth straight month underscored the economy's woes and
chipped away at the euro's recent gains [ID:nBAE001626].
The dollar was up 1.5 percent at 95.87 yen JPY but down
2.2 percent on the week, while sterling fell 0.5 percent to
$1.4439 <GBP=> but ended the week 3.4 percent firmer.
PRESSURE TURNS TO ECB
Moran said a weaker dollar will cause headaches for other
economies, including in Asia and Europe, as it lifts the value
of their currencies in a recession and raises deflation risks.
That is what the Fed and central banks in Britain, Japan
and Switzerland are seeking to avoid by cutting interest rates
to zero and flooding their economies with money.
The Swiss National Bank even entered currency markets last
week to sell the franc. When it drifted higher again this week
against the dollar and euro after the Fed's move, SNB President
Jean-Pierre Roth knocked it down on Friday, saying deflation
risks make it important to keep the franc from appreciating.
All of this, analysts said, puts pressure on the European
Central Bank, which still has interest rates at 1.5 percent.
Strategists at UBS said the euro's rise this week amounts
to "an effective tightening of monetary policy" and threatens
euro zone companies' overseas earnings.
"We believe the ECB will need to shift its rhetoric as soon
as possible," they wrote in a research note, adding they expect
the central bank to cut euro zone rates to 1 percent in April.
In the days ahead, though, the euro may add to this week's
gains, particularly if stock markets can resume a recent rally
that ran out of steam on Friday.
Boris Schlossberg, head of currency research at GFT Forex
in New York, said the euro may rise above $1.40 next week.
Jessica Hoversen, a fixed-income and currency analyst at MF
Global, Ltd, in Chicago, said: "We are not convinced that the
dollar selling is over."
(Additional reporting by Vivianne Rodrigues; editing by Leslie
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