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Saturday May 13, 2006 - 02:09:01 GMT
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FOREX-Dollar drops as bearish sentiment persists

FOREX-Dollar drops as bearish sentiment persists
Fri May 12, 2006 4:58 PM ET

(Updates prices, adds comment)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 12 (Reuters) - The dollar fell on Friday, and even better-than-expected U.S. trade data for March failed to lift the market's overwhelmingly bearish sentiment on the currency.

Investors increasingly expect the Federal Reserve to end its two-year drive to raise U.S. interest rates soon, despite a recent strengthening in some U.S. economic data.

Expectations for a Fed pause have pushed the dollar lower against the euro. It is down around 8.0 percent against the single currency since the beginning of 2006.

"In general, we are in a dollar-negative environment," said Eric Darwell, currency strategist at Citigroup in New York.

"We had a decent trade number and yet the dollar sold off. I guess people are kind of moving ahead and pricing in a Fed pause at the next meeting and are a little bit concerned about medium-term growth in the U.S.," he added.

A smaller-than-expected $62 billion March U.S. trade deficit failed to allay investor concerns about underlying structural problems in the U.S. economy. Analysts had expected the deficit to widen to $67 billion. For details, see [ID:nN12392496].

In late afternoon trade, the euro was up 0.7 percent at $1.2918, while the dollar was down 0.6 percent against the yen at 110.07. Against the Swiss franc, the dollar fell 1.3 percent to 1.1976 francs . Sterling rose 0.6 percent to $1.8940 .

The dollar had fallen earlier to one-year lows against major European currencies (the euro, Swiss franc, sterling) but pared some losses after news of the smaller trade gap. It quickly gave back those gains.

Offsetting the positive impact of the trade data was a weaker-than-expected preliminary U.S. consumer sentiment index for May. That further bolstered views that the Fed will pause at its next meeting.

The University of Michigan's preliminary reading of its May consumer sentiment index fell to 79.0 from April's final 87.4, according to a report released on Friday. Economists polled by Reuters had expected a median reading of 86.1. For details, see [ID:nN12357749].

After the University of Michigan report, the chances of another Fed rate increase in June , as reflected by fed fund futures, briefly slipped to around 38 percent from Thursday's level of 40 percent, broadly in line with expectations.

"It does reinforce recent soft readings on the consumer sentiment side and plays well with the underlying caution we've seen recently from the Fed," said Samarjit Shankar, director of strategy at Mellon Bank in Boston. "It's not particularly dollar-positive, and is yet another argument in calling for a pause in the dollar's rate-support."

The Fed next meets in late June. Wall Street primary bond dealers polled by Reuters believe the Fed may have already made its last rate hike in the current cycle, although the U.S. central bank is leaving its options open for now.

"There aren't any domestic economic factors available at this point that can help the dollar break down the trend. The velocity of the decline overwhelmingly signals dollar weakness for months to come, " said Joel Ward, fund manager at Joel Nathan Forex Fund, a private spot market currency fund in Sacramento, California. (Additional reporting by Jamie McGeever)

© Reuters 2006. All Rights Reserved.


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