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Monday June 5, 2006 - 10:28:03 GMT
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FOREX-Dollar slides to 1-yr low vs euro on rate outlook

FOREX-Dollar slides to 1-yr low vs euro on rate outlook
Mon Jun 5, 2006 6:14am ET9

(Updates prices, adds comment)

By Katie Hunt

LONDON, June 5 (Reuters) - The dollar hit a one-year low against the euro on Monday after surprisingly soft U.S. employment data last week dampened expectations the Federal Reserve will raise interest rates again this month.

In contrast, strong euro zone data has fuelled euro-supportive expectations the European Central Bank may hike rates from 2.5 percent by as much as 50 basis points this Thursday.

U.S. non-farm sector added only 75,000 jobs in May -- 100,000 fewer than expected. The data prompted futures markets to slash expectations for a June Fed hike to as low as 46 percent from 68 percent just before the release.

"After the payrolls (there is) a greater chance that the Fed will pause and at the same time we are getting still pretty strong numbers out of the euro zone and some people are querying whether the ECB might go 50 basis points this week," said Daragh Maher, senior currency strategist at Calyon.

By 1000 GMT the euro had climbed as high as $1.2979 , hitting levels last seen in May 2005, before coming off slightly to $1.2960. Analysts said options placed around the $1.30 area could temper a further rally in the euro for now.

Against the yen, the euro hit a six-week high at 144.99 yen , up around a third of a percent on the day. The dollar was steady against the Japanese currency at 111.71 yen .

Trading was relatively subdued in Europe, with market and public holidays in a number of countries and with no major euro zone data due. The reduced liquidity could increase volatility and leave markets more focused on technical levels.


The Fed's 16 straight increases in short-term rates to 5 percent had boosted the dollar's yield advantage in 2005 and fired a rally in the U.S. currency.

But anticipation of a coming Fed pause, along with worries that Washington wants a weaker currency to help curtail the massive U.S. trade deficit, have all undermined the dollar this year.

Some traders say the euro will likely test $1.30 this week, while others say it could be in for a major correction given the huge speculative buying in the currency recently.

Currency speculators boosted their net long positions in the euro to a record 79,884 contracts in the week to May 30, from 72,076 a week earlier, data from the Commodity Futures Trading Commission showed on Friday.


In the absence of any euro zone data on Monday, investors were looking ahead to the U.S. Institute for Supply Management's service sector survey at 1400 GMT. The index is expected to show growth moderating, with the headline index forecast to dip to 60.0 in May from 63.0 in April.

"If we should see some good data then perhaps the dollar will be able to strengthen a bit again but certainly sentiment in the market seems to be very dollar bearish right now," Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm.

Further clues on the path of interest rates in the world's major economies could come from the International Monetary Conference in Washington, where Fed Chairman Ben Bernanke, ECB President Jean-Claude Trichet and Bank of Japan Deputy Governor Toshiro Muto all participate in a panel discussion at 1815 GMT.

The April call by Group of Seven industrial powers for China and emerging Asian countries to allow more currency appreciation to help fix global imbalances added fuel to a month-long dollar sell-off in April.

The Group of Seven finance ministers, along with their Russian counterpart, are due to meet again in St. Petersburg at the end of this week.

"With the market focus firmly on structural imbalances, the U.S. trade deficit will continue to weigh on the dollar, as will the looming G8 meeting in light of the dollar's performance following the Washington communique in April," Rabobank said in a note to clients.

(Additional reporting by Toni Vorobyova)

© Reuters 2006. All Rights Reserve


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