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FOREX-Dollar hits 2-week lows vs euro, yen

FOREX-Dollar hits 2-week lows vs euro, yen
Thu Jul 27, 2006 6:37am ET254
(Updates prices, adds comment, changes byline)

By Katie Hunt

LONDON, July 27 (Reuters) - The dollar hit two-week lows against the euro and the yen on Thursday, extending losses triggered by a Federal Reserve survey suggesting the U.S. economy may be slowing and interest rates could soon peak.

The dollar also lost ground, particularly against the yen, after two U.S. senators said on Wednesday they would demand a vote on legislation for steep tariffs on Chinese goods unless Beijing allowed the yuan to strengthen significantly by the end of September.

The dollar posted its sharpest fall against the euro in three months on Wednesday after the Fed's Beige Book said U.S. economic activity grew overall between June and mid-July, but that there were many local reports of slowing.

The report was interpreted as reducing the likelihood that the Fed would hike interest rates for an 18th consecutive time to 5.5 percent at its meeting on Aug. 8.

"The Beige Book didn't do the dollar any favours, being rather soft on economic outlook and on inflation as well," said Niels Christensen, senior currency strategist at Societe Generale in Paris.

"Rate hike expectations in the U.S. have been scaled back quite significantly -- it's less than 50-50 now (for an August hike)," he added.

By 1024 GMT, the dollar was down 0.2 percent against the euro at $1.2744 , just off an earlier two-week low of $1.2749 and after falling more than one percent on Wednesday.

The dollar also hit a two-week low against a basket of currencies <=USD> and fell more than half a percent to a two-week low against the yen, at 115.53 yen .

The euro hit a record high against the yen, in anticipation of a European Central Bank interest rate hike next week and on expectations that Japanese rates will stay lower than those of other major economies for some time to come.

The euro rose to a record of 148.06 yen, according to Reuters data, before reversing gains to trade around 147.25 yen , down 0.4 percent on the day.


China's yuan set its highest level against the dollar since its revaluation last year amid renewed pressure for the currency to appreciate fast both inside and outside China. This in turn helped the yen, which is often traded as a proxy for the tightly controlled yuan.

Senators Charles Schumer and Lindsey Graham are launching a bill that threatens China with a 27.5 percent tariff on its exports to the United States if the yuan has not appreciated substantially within six months of the bill becoming law.

An increasing number of economists at Chinese state-backed institutions are urging the use of a yuan appreciation as a step to cool the economy, which grew 11.3 percent from a year ago in the second quarter -- the fastest in a decade.

"The key issue is that the situation in China seems to be getting out of control in terms of growth. The background to the yuan speculation is that this time it's necessary. Schumer and Graham are adding to this picture," said Derek Halpenny, currency economist at BOTM-UFJ.

News that ratings agency Standard & Poor's raised China's long-term sovereign credit rating could also put upward pressure on the yuan, analysts said.


With no major euro zone data released on Thursday, market focus is likely to remain on the outlook for Fed rates, and thus on U.S. data. U.S. durable goods orders for June are due at 1230 GMT, followed by new home sales numbers at 1400 GMT.

After the Beige Book, futures markets pared expectations of the Fed raising rates next month to a 46 percent chance from 54 percent just before the report landed.

Meanwhile, the European Central Bank is widely forecast to raise rates next week to 3.0 percent from 2.75. Most then expect at least one more rate hike, and possibly more, by the end of year.

The forward-looking GfK gauge of German consumer sentiment, published on Thursday, beat analyst expectations with a jump to 8.6 in August -- its highest in nearly five years.

© Reuters 2006. All Rights Reserved.


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