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Friday December 1, 2006 - 11:36:20 GMT
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FOREX-Dollar hits 14-yr low vs sterling, 20-mth low vs euro

FOREX-Dollar hits 14-yr low vs sterling, 20-mth low vs euro
Fri Dec 1, 2006 6:06am ET143

(Updates prices, adds quotes, changes byline)

By Carolyn Cohn

LONDON, Dec 1 (Reuters) - The dollar hit a 14-year low against sterling and a 20-month trough versus the euro on Friday after weak U.S. data reinforced expectations the Federal Reserve might cut interest rates next year.

U.S. data on Thursday showed activity in the Midwest shrank in November for the first time in 3-1/2 years, which augured ill for the ISM manufacturing survey for November due later.

Markets are also keen to hear from Federal Reserve chairman Ben Bernanke and other Fed officials who speak later, although in recent speeches they have delivered a generally upbeat view.

"We are seeing dollar weakness as the market focuses on the weak real economic data in the U.S., while the euro zone just seems to go from strength to strength," said Tobias Thygesen, senior analyst, at Danske Markets in Copenhagen.

The dollar fell as low as $1.9748 per pound , hitting its lowest for a second day since Sept. 1992 -- just before the UK abandoned the European Exchange Rate Mechanism, the precursor to the euro. Investors are looking for sterling to rally to the elusive $2 level, last reached also in Sept. 1992.

However, the dollar recovered to $1.9673 to the pound by 1045 GMT, steady from the U.S. close, after data showing British manufacturing activity growth slowed unexpectedly in November to its weakest pace in eight months.

The dollar also fell to a 20-month low of $1.3282 per euro for an eighth straight day, within a few cents of its record low of $1.3667 hit in December 2004, before recovering to $1.3224, steady on the day.

The yen was also weak following tame Japanese inflation data, hitting record lows near 154 per euro and 8-year lows against sterling and the Swiss franc .

The dollar was up half a percent on the day against the yen at 116.35 yen .


A survey showed growth in the euro zone's manufacturing sector slowed slightly to 56.6 in November, although still in expansionary territory. The euro zone unemployment rate unexpectedly fell to 7.7 percent in October, from 7.8 percent in September.

The U.S. ISM (Institute of Supply Management) index is expected to rise slightly to 51.5 in November from 51.2 in the previous month.

"A sub-50 reading would see markets move to discount imminent Fed easing ... and would, unless and until risk assets get hit, spark sharp dollar declines," HBOS said in a note to clients.

The dollar was also at a 20-month low against an index of currencies <=USD>. The U.S. rate outlook, exaggerated year-end trading and speculation about central bank diversification away from the dollar have knocked 3.5 percent off the value of the dollar against the euro in the past week.

The dollar could keep weakening because of imbalances in the U.S. economy but was unlikely to suffer an abrupt fall, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said on Friday.

Bernanke speaks in Washington at 1400 GMT, and Philadelphia Fed president Charles Plosser, Chicago Fed President Michael Moskow and Richmond Fed president Jeffrey Lacker are also due to speak.


The yen's sentiment has also been weak following a flurry of launches of funds aimed at investing in higher-yielding currencies this week, including Nomura Asset Management's U.S. corporate debt fund on Thursday.

Data on Friday showed a rise in Japanese core consumer prices slowed unexpectedly in October to just 0.1 percent from a year earlier, raising more doubts about whether the Bank of Japan can lift rates this month.

With the pace of core inflation in Japan so tepid, analysts said the Bank of Japan may have a tough time raising rates as soon as this month's policy meeting.

© Reuters 2006. All Rights Reserved.


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