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Friday October 27, 2006 - 09:25:25 GMT
Reuters - www.reuters.com

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FOREX-Dollar eyes US GDP; yen recovers from low vs euro

FOREX-Dollar eyes US GDP; yen recovers from low vs euro
Fri Oct 27, 2006 4:23am ET138

(Recasts, adds quotes and comment, changes byline and dateline. Previous: TOKYO)

By Jamie McGeever

LONDON, Oct 27 (Reuters) - The dollar on Friday recovered some ground from what's been a bruising week as traders trimmed bets against the currency ahead of U.S. economic growth data, while the yen rebounded from a new record low against the euro.

The yen fell to a new nadir against the euro earlier in the global day after a slowdown in the growth of Japanese consumer prices suggested that the Bank of Japan could wait until 2007 to raise interest rates.

The yen recovered most of these intraday losses, however, as traders squared positions and turned their attention to the advance estimate of U.S. third quarter gross domestic product. That figure, together with a key measure of inflation in the three months to September, will be closely scrutinised for clues on the path of U.S. interest rates.

"Today, the focus will be on GDP. But in the bigger picture, we're not getting too bearish on the dollar. We don't believe the environment is poor for the dollar - it's a high yielding currency, although not the highest, and volatility is low - while long dollar positions aren't overstretched," said Trevor Dinmore, currency strategist at Deutsche Bank in London.

At 0755 GMT, the euro was at $1.2676 , down 0.1 percent from late New York levels on Thursday. In overnight trade, it scaled $1.27 for the first time in three weeks.

The euro was broadly flat on the day against the yen at 150.50 yen , having hit a record high earlier of 150.80 yen, according to electronic platform EBS.

Against the yen, the dollar was up slightly at 118.51 yen .

U.S. PCE ALSO IN FOCUS

Economists surveyed by Reuters expect the advance estimate of U.S. GDP to be a 2.2 percent annualised rate, marking a slowdown from the 2.6 percent rate of expansion in the second quarter.

Inflation measured by core personal consumption spending excluding food and energy - a gauge favoured by the Fed - is expected to slow to 2.6 percent from 2.7 percent. The Fed's 'comfort zone' for this level of inflation is generally thought to be between 1 and 2 percent.

The dollar's been under broad selling pressure since the Fed's policy statement on Wednesday accompanying its decision to leave rates on hold at 5.25 percent, which many traders said was slightly more relaxed on the inflation outlook than expected.

Deutsche Bank's Dinmore said a soft GDP print could weigh on the dollar. But slowing growth need not be an automatic sell signal, with traders still likely to be drawn to the dollar's relative interest rate allure.

Currency strategists at UBS agreed.

"We don't believe our medium term bearish dollar scenario will play out just yet, and we think we may get another test of the downside range in the euro first towards $1.24 over one month," they wrote in a research note on Friday.

The euro has been well-supported this week by euro zone economic data and comments from European Central Bank officials that suggest the ECB will continue to raise interest rates next year in order to ward off persistent inflation risks.

Another 25-basis point hike to 3.5 percent is widely expected before the end of the year but markets are less certain about what the ECB will do next year.

Meanwhile, the yen recovered from its slide overnight on data showing Japan's nationwide core consumer price index in September rose 0.2 percent from a year earlier, a touch below expectations for a 0.3 percent increase and slowing from a 0.3 percent rise in August.

Traders quickly trimmed expectations of a possible rate rise this year, but the selling momentum was short-lived.

Japan's top financial diplomat, Hiroshi Watanabe, said he did not expect the yen to weaken further given Japan's healthy economic fundamentals, and played down the impact of the yen carry trade, where investors borrow cheaply in yen to buy higher-yielding currencies.

Most in the market expect that the BOJ, which lifted rates in July for the first time in six years, will hike by another quarter percentage point to 0.5 percent in the January-March period.

© Reuters 2006. All Rights Reserved.

 

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