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Friday July 28, 2006 - 20:38:47 GMT
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FOREX-Dollar slumps after weak US GDP shrinks rate hopes

FOREX-Dollar slumps after weak US GDP shrinks rate hopes
Fri Jul 28, 2006 4:28pm ET147
(Updates prices, adds quote)

By David McMahon

NEW YORK, July 28 (Reuters) - The dollar slid on Friday after a report showed the U.S. economy grew at a surprisingly slow clip in the second quarter, backing a view that the Federal Reserve may leave interest rates on hold next month.

The dollar dropped sharply after the Commerce Department said gross domestic product grew at a 2.5 percent annual pace in the April-June quarter, below Wall Street analysts' forecasts of a 3 percent advance. For details, see [ID:nN28318091].

An inflation gauge favored by the Fed -- a measure of personal consumption expenditure prices minus food and energy -- jumped at the fastest rate in nearly a dozen years, but that did little to help the dollar.

Analysts said the market was coming around to the view outlined by Fed chief Ben Bernanke last week when he said a slowing of economic growth would help moderate inflation, suggesting the Fed may not need to raise rates yet again.

"It certainly did confirm what we've heard from Bernanke ... The economy is slowing fairly rapidly and core inflation remains well contained," said Michael Woolfolk, currency strategist at Bank of New York.

"The irresistible conclusion is that they are going to pause in August. That's good for the stock market, good for the bond market, but not too good for the dollar."

The yield on the 10-year Treasury note dipped below 5 percent for the first time since mid-June, reflecting a view that the Fed may take a break next month after raising interest rates at 17 straight meetings to its current 5.25 percent.

The dollar fell 0.85 percent against the yen to 114.75 yen . The euro rose 0.4 percent on the day to $1.2745 . The euro zone single currency fell 0.45 percent to 146.30 yen , almost two yen below a record peak of 148.07 yen scaled in the previous session.

The dollar was set to end the week slightly lower against a basket of major currencies, its second straight weekly fall.


The yen, which is often traded as a proxy for the tightly controlled Chinese yuan, climbed across the board. The yen has gained support this week from speculation China will allow faster appreciation of the yuan after two prominent U.S. senators stepped up pressure on Beijing.

Market players are now waiting for a bevy of U.S. economic data next week, which will give the last snapshot of growth and inflation ahead of the Fed's next policy meeting on Aug. 8.

The data include the Chicago PMI and ISM Manufacturing surveys, a core PCE reading on inflation, and the closely watched monthly jobs report at the end of the week.

"I'd expect the dollar's weakness to continue next week," said Hugh Walsh, a currency trader at Fortis Financial Markets in New York. "Although nobody seems to be expecting any big breakout from the recent ranges for now, at least not until people have had a look at the jobs data."

Despite its fall this week, the dollar is still trapped not far from the middle of its range over the past two months against both the euro and the yen.

Fed fund futures were pricing in a 30 percent chance the Fed will raise rates next month, compared with 46 percent before the GDP data and as high as about 90 percent last week.

Next week also brings rate-setting meetings of the European Central Bank, the Reserve Bank of Australia and the Bank of England. Markets almost unanimously expect the ECB to raise rates by a quarter percentage point to 3 percent, and the RBA to lift overnight rates to 6 percent.

Most economists expect the Bank of England to leave rates on hold at 4.5 percent, but some see an outside chance of a rate hike, given strong UK economic data this month. (Additional reporting by Nick Olivari)

© Reuters 2006. All Rights Reserved.


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