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Wednesday April 5, 2006 - 21:22:09 GMT
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FOREX-Dollar weakens as interest rate advantage wanes

FOREX-Dollar weakens as interest rate advantage wanes
Wed Apr 5, 2006 4:44 PM ET

(Updates prices, adds comments, changes byline)
By Kevin Plumberg

NEW YORK, April 5 (Reuters) - The dollar fell to two-month lows against the euro on Wednesday, weakened by the diminishing advantage of U.S. interest rates over those in other regions.

The euro by late afternoon was testing a two-month high of $1.2305 reached earlier, after having hit a 15-month high against sterling and a record high against the yen.

Traders and analysts placed high importance on whether the euro would reach $1.2325, the approximate high for the year that was hit in January.
"That's the last important level that needs to go and if we can make a break on a closing basis above $1.2325, we will start to see this move accelerate," said Tom Fitzpatrick, chief technical analyst with CitiFX Technicals.

Bond yield spreads have moved against the dollar this week. The yield spread of 10-year U.S. Treasury notes over comparable euro zone paper has narrowed eight basis points since Friday to 100 basis points. For more on the Treasury market, click on [ID:nN05541122]

In the last few weeks, a handful of large investment banks including ABN AMRO, Bank of America, Citigroup and Lehman Brothers have advised clients to start opening bets against the dollar, based partly on expectations the Federal Reserve will soon halt its nearly two-year interest rate raising campaign.

Last week, the Fed raised rates for the 15th consecutive time, to 4.75 percent. The dollar rallied last year based on widening interest rate and economic growth differentials.

With a meeting of the European Central Bank on Thursday and a U.S. payrolls report on Friday, risks were still running high for the greenback.

"These events could propel euro/dollar to $1.25-type levels as key interest rate spreads would again adjust and validate the break," said David Mozina, head of currency strategy with Lehman Brothers in New York.

The euro was also up 0.4 percent against sterling at 70.10 pence , having earlier hit a 15-month high of 70.21 pence. Against the yen, the euro had hit a record high of 144.56 yen .
igh-yielding currencies such as the Australian dollar and New Zealand dollar have continued to rebound from multi-month lows hit in March.

Sentiment on the dollar has deteriorated to such an extent that even seemingly good news for the currency was brushed aside.

Dollar selling only slowed, not stopped, after a gauge of the U.S. services sector was a shade above expectations. Even a remark by U.S. Treasury Secretary John Snow that Friday's March employment report will contain "good numbers" could not turn momentum in the dollar's favor. To read more on Snow's comments, click on [ID:nN05366252].

The European Central Bank is widely expected to leave interest rates on hold at 2.5 percent on Thursday, but bank chief Jean-Claude Trichet should signal a rise in May, economists say.

Currency dealers this week have been aggressively buying the euro and broadly shunning the dollar, with uncertainty surrounding just how many more rate increases the Federal Reserve has left in the tank.

"The market is pricing in a lot of good news for Europe and is not fully appreciating the good news we have for the U.S. The psychology is getting ahead of the fundamentals," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman in New York. (Additional reporting by Jamie McGeever)

© Reuters 2006. All Rights Reserved.


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