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Tuesday November 7, 2006 - 23:51:18 GMT
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FOREX-Dollar dips ahead of U.S. election results

FOREX-Dollar dips ahead of U.S. election results
Tue Nov 7, 2006 4:50pm ET16

(Corrects 2nd paragraph to show markets sold the euro not the dollar in late afternoon trading)

(Updates prices, adds quote)

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 7 (Reuters) - The dollar weakened on Tuesday, but pared losses late in the afternoon after dropping to six-week lows against the euro earlier, as traders grew cautious about the results of the U.S. midterm elections.

Traders said the dollar came off lows going into the end of the New York session, with markets covering their short positions built earlier and selling the euro after it failed to sustain gains above $1.2800 versus the dollar.

"With U.S. election results not yet at hand and ... uncertainty in the market, it is easy to sell the dollar," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.

In late afternoon trading, the euro was up 0.4 percent at $1.2771, after touching a peak of $1.2819, the highest since Sept. 25. Traders said the euro's earlier surge was further fueled by stop-loss trades around $1.2780-$1.2800.

Polls indicate the Democrats may grab control of the U.S. House of Representatives for the first time in more than a decade in the elections, although President George W. Bush's Republican Party may have a slight edge in its battle to hold the Senate. A Democrat victory in the Senate, however, is not being ruled out, analysts say.

Although most analysts expect the election outcome to have little sustained impact on the dollar, some argue that Democratic control of the lower house could be negative for the currency as it may lead to a rise in protectionist policies or to political deadlock that could slow reforms.

"I can't see much of a dollar reaction to the congressional election," said Shaun Osborne, chief currency strategist, at TD Securities in Toronto.

"Markets would assume that a Democrat input into policy-making would make it harder for the Bush administration to spend. But that's pretty much factored in by the market," he added.

The dollar fell 0.5 percent to 117.65 yen , and against the Swiss franc, a traditional safe haven in times of uncertainty, the greenback was down 0.5 percent at 1.2495 francs .

The Australian dollar , up 0.2 percent at US$0.7728, was also in focus ahead of a key interest rate decision by the Reserve Bank of Australia.

The RBA later on Tuesday is expected to announce a quarter-point percentage increase in its official cash rate to 6.25 percent. Analysts say should the rate hike fail to materialize, the Aussie dollar can expect a drubbing.

Sterling rose 0.5 percent to $1.9056 .

The greenback has now erased gains made after a solid U.S. jobs report on Friday, a worrying sign for dollar bulls.

The dollar was already under pressure earlier in the session after Bank of Japan Governor Toshihiko Fukui said the central bank would raise interest rates preemptively to avoid sharp economic swings.

Fukui's comments played to market concerns that the dollar's interest rate advantage is set to wane as the Federal Reserve keeps rates flat, or cuts them as the U.S. economy slows.

"BoJ Governor Fukui reminded the market today that gradual monetary tightening does not necessarily mean that the bank will sit on its hands for too long," wrote Bear Stearns in a research note.

"The outside chance of a (BoJ) hike, probably at the Dec. 18-19 meeting, rather than the Nov. 15-16 get-together, has increased," the bank said.

San Francisco Federal Reserve President Janet Yellen on Monday night also dealt a blow to the dollar, saying some countries with excess savings, which help the United States finance its gaping trade deficit, may consider putting less money into U.S. assets.

(Additional reporting by David McMahon)

© Reuters 2006. All Rights Reserved.


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