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Friday May 12, 2006 - 10:26:51 GMT
Reuters - www.reuters.com

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FOREX-Dollar falls towards key $1.30 level per euro

FOREX-Dollar falls towards key $1.30 level per euro
Fri May 12, 2006 6:15 AM ET

(Updates prices, adds fresh quotes, changes byline)

By Carolyn Cohn

LONDON, May 12 (Reuters) - The dollar fell to one-year lows near the psychologically key $1.30 level against the euro on Friday as investors fretted about U.S. structural problems and the possibility of a pause in U.S. interest rate rises.

The dollar also dropped 1 percent on the day to one-year lows against an index of currencies and 8-month lows against the yen ahead of U.S. trade data at 1230 GMT, forecast to show a slight widening in the deficit.

"We are moving onto the structural scenario," said Steven Saywell, chief currency strategist at Citigroup.

Weaker than expected U.S. retail sales data on Thursday meanwhile raised expectations the Federal Reserve might pause its two-year credit tightening campaign in June after raising interest rates to 5 percent this week.

The dollar fell to a 1-year low of $1.2956 per euro , and was trading at $1.2926 by 1000 GMT, down three quarters of a percent on the day.

The dollar fell to a one-year low of 83.61 against an index of currencies <=USD>.

It also hit a one-year low of 1.1966 Swiss francs , down more than 1 percent on the day, and of $1.8998 per sterling .

The dollar dropped to 109.32 yen , its lowest since September and down more than 1 percent on the day.

The dollar also hit 13-1/2 year lows against the oil-rich Norwegian crown.

"The dollar is in a whole world of hurt," said Geoff Kendrick, currency strategist at Westpac.

CYCLICAL, STRUCTURAL WOES

The dollar has fallen 8 percent against the yen since mid-April, when finance chiefs of the Group of Seven industrial powers called for nations with big trade surpluses, especially in Asia, to let their currencies rise and help fix global imbalances.

Markets took that to mean that the G7 suggested a decline in the dollar was needed.

The dollar is also losing cyclical support as more people expect the Fed will pause soon. It meets next in June but Wall Street primary dealers polled by Reuters believe the Fed may have already made its last rate hike in the current cycle, although the central bank is leaving options open for now.

The European Central Bank is expected to lift rates by 25 basis points to 2.75 percent next month, while a rate rise in Japan -- where rates have hovered near zero for about five years -- is expected in the third quarter.

Concerns about the huge U.S. trade deficit and global imbalances were behind the dollar's decline to a record low against the euro of $1.3667 set in December 2004.

Economists forecast a slight widening of the trade gap to $67 billion in March from $65.74 billion the previous month, when the Lunar Year holidays helped dampen imports from China. The deficit hit a record $68.6 billion in January.

Highlighting the still widening imbalances, China said on Friday its trade surplus swelled to $10.46 billion in April, more than doubling from a year earlier.

JAPAN WARNINGS

The yen's recent rally prompted Japanese officials to step up warnings on Friday that such strength could hurt the economy's recovery from deflation.

Finance Minister Sadakazu Tanigaki said that big currency swings could have adverse affects on corporate profitability, while Economics Minister Kaoru Yosano said there were both good and bad aspects to a stronger yen.

But some traders pointed out that the authorities stayed away from the market when the dollar fell below 105 yen in late 2004 and early 2005, adding that intervention was unlikely until the currency slides to around 100 yen.

Analysts generally believe Japan is unlikely to intervene given the outlook for steady economic growth, which is expected to prompt the Bank of Japan to raise rates in the coming months.

© Reuters 2006. All Rights Reserved.

 

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