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Wednesday May 13, 2009 - 11:09:55 GMT
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FOREX NEWS-Dlr rebounds from 4-mth low as BoE report hits stg

Wed May 13, 2009 7:05am EDT

* Dollar bounces from 4-month low, led by recovery vs stg

* BoE growth, inflation projections hit sterling

* FT article on threat to US AAA rating weighs on dlr

(Adds quotes, detail, updates prices)

By Jamie McGeever

LONDON, May 13 (Reuters) - The dollar rebounded from a four-month low on Wednesday, rallying against sterling after the Bank of England said it expects anaemic UK inflation and the economy to recover more slowly than previously thought.

The BoE's quarterly inflation report took the wind out of stocks' sails, sending bank shares down 4 percent and sparking a wave of profit-taking from sterling's recent rally that culminated in a four-month high against the dollar on Tuesday.

The dollar had earlier fallen to fresh lows after an article in the Financial Times flagged the risk of the United States losing its top sovereign credit rating.

But the BoE report and subsequent comments from Governor Mervyn King triggered a rebound.

"The overall picture is quite sterling negative. It's more the recovery profile, which is way too optimistic," said Ian Stannard, senior currency strategist at BNP Paribas in London. "(King) was quite pessimistic, and he's probably right to be."

British inflation will fall to as low as 0.5 percent before recovering to just above 1 percent in two years, and the economy will shrink on an annual basis by as much as 4.5 percent at the start of the second quarter this year before recovering more slowly than previously thought. [ID:nLD56256]

At 1045 GMT sterling was down 0.7 percent on the day at $1.5165 <GBP=>, a cent and a half down from levels just before the BoE report was published.

The dollar index, which measures its performance against a basket of six currencies, was last flat on the day at 82.30 .DXY, having earlier hit a four-month low of 81.871.

The euro was flat on the day at $1.3645 <EUR=>, having earlier hit a seven-week high of $1.3722 on trading platform EBS.

The dollar was down a third of a percent against the yen at 96.10 yen <JPY=>.


Sterling's sharp fall relieved some of the selling pressure on the dollar that had intensified since last week's break below key 200-day and 200-week moving average support levels on technical charts.

The euro has also broken above similar moving averages against the dollar.

Earlier on Wednesday, the FT report had helped push the dollar to fresh multi-month lows, although analysts urged caution because the United States has run persistent and growing budget deficits for years, noting that a downgrade would have huge economic, political and financial implications.

But it put back under the spotlight rising U.S. debt issuance and foreign central banks' willingness to buy and hold that paper, a crucial part of funding the country's deficits and a major crutch for the dollar.

"That's a discussion that's been going on for quite a while, but is it the reason why the dollar is selling off sharply? I'd be very cautious, but it does fit with the theme," said Michael Klawitter, head of currency strategy at Dresdner Kleinwort in Frankfurt.

"You can argue that if we see U.S. yields rising further, major central banks holding Treasuries will take a hit and that will revive discussion on the dollar as the global reserve currency," Klawitter said.

Talk about the potential for fund repatriation flows from Japanese investors related to redemptions and coupon payments on U.S. Treasuries this week also helped push the dollar lower against the yen, traders said.

The U.S. Treasury Department is due to make $21 billion in coupon payments on Friday as part of flows tied to its quarterly refunding moves. Another $52 billion of coupon securities are due to mature, for a total cash outflow of $73 billion.

Euro zone and UK stocks, meanwhile, fell 0.5 percent after the BoE report and oil prices pared gains after reaching near six-month peaks on Tuesday.

European bank shares were down 4 percent .SX7P, as investors turned to U.S. retail sales data at 1230 GMT ECON.

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