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Thursday October 26, 2006 - 20:16:58 GMT
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Dollar tumbles as chances wane for another Fed hike

Dollar tumbles as chances wane for another Fed hike
Thu Oct 26, 2006 3:46pm ET145

(Updates to add comments, details, refreshes prices)

By Amanda Cooper

NEW YORK, Oct 26 (Reuters) - The dollar fell for a second straight session on Thursday after the Federal Reserve's benign economic outlook on Wednesday forced investors to rethink the path of U.S. monetary policy and sell the U.S. currency.

The dollar-friendly sentiment that had built up in the weeks leading up to the Fed's policy meeting steadily crumbled throughout another session after the central bank made no changes to its outlook for more moderate growth and inflation.

The euro's breach of a key technical level in the New York afternoon unleashed a raft of selling that put the dollar on track for its biggest daily decline in two weeks against a basket of currencies <.DXY>.

"The Fed has very much sent the same signal that they've been sending, and data has been mixed to softer," said Daniel Katzive, foreign exchange strategist with UBS Securities in Stamford CT.

As a result, he said, "you're seeing U.S. short-end yields ... falling relatively sharply today and that's weighing on the dollar."

The Fed's post-meeting statement on Wednesday was virtually identical to that of its previous meeting in September and gave no signal that any tweaking of interests rates would be forthcoming, at least for the time being

The bank left the key fed funds rate at 5.25 percent for the third policy meeting in a row and repeated it expects growth to moderate enough to lower inflation. Continued...

Financial markets have swung back to reflecting a small chance that the Fed will have to cut rates early next year in order to keep economic growth on track, from implying a slight chance that rates will rise in that period.

The euro sailed to a session high of $1.2703, marking a three-week peak, before easing back to $1.2689, showing a 0.7 percent gain on the day.

Against the yen the dollar was down almost 0.6 percent at 118.41 yen and was on course for its largest daily decline in a month against the Japanese currency.

Former Fed chief Alan Greenspan dealt an additional blow to the dollar earlier in this session when he said in a speech that some private and official investors were shifting into euros from the greenback.

Speculators had sold the euro fairly aggressively earlier this month in anticipation of a signal from the Fed that inflation was picking up enough to warrant more rate rises.

After dipping to three-month lows just below $1.25 earlier this month, the euro has recovered most of October's losses in the last three trading sessions alone and as such may not have much more scope to rise, analysts said.

"In euro/dollar I don't think it's going to take us much further," said Greg Anderson, senior currency strategist at ABN Amro in Chicago.

"I think we'll run into good selling at $1.2700-70ish, good technical resistance and the dollar/yen is actually where it's got more room for run," he said.

Data on Thursday -- including durable goods orders and new home sales for September -- merely reinforced the view that the economy is slowing at a moderate pace, which would allow the Fed to keep interest rates unchanged, analysts said.

The dollar initially slipped after the government reported that durable goods orders had risen by less than expected when stripping out the volatile transport orders component, while the home sales data showed a larger rise than expected last month. See [ID:nN25384935] and [ID:nN25315981] for details on the data.

Next on the data slate is on a first look at U.S. economic growth in the third quarter of the year, due on Friday.

Wall Street economists are looking for gross domestic product to have expanded at a 2.2 percent pace, down from 2.6 percent in the second quarter.

© Reuters 2006. All Rights Reserved.


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