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Monday December 4, 2006 - 11:14:37 GMT
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FOREX-Dollar recovers from 20-mth lows, more weakness seen

FOREX-Dollar recovers from 20-mth lows, more weakness seen
Mon Dec 4, 2006 6:08am ET138

(Updates price, adds quotes, changes byline)

By Toni Vorobyova

LONDON, Dec 4 (Reuters) - The dollar recovered from an earlier 20-month low against a basket of currencies on Monday as investors locked in profits after shaving more than 3 percent off its value in less than two weeks.

A run of weak U.S. data has boosted expectations that the Federal Reserve might cut interest rates next year.

On Friday, the Institute for Supply Management's survey of U.S. national manufacturing in November showed a contraction in the factory sector for the first time in 3-1/2 years.

In contrast, expectations for a European Central Bank rate hike this week and perhaps again in early 2007 have boosted the euro, sending it to within three cents of its record high versus the dollar and to a record peak against the yen on Monday.

Investors took advantage of the absence of major data or market-moving comments by policymakers to lock in profits from the dollar's recent sharp fall.

"On a day without any news it's not too surprising that we see a bit of a setback for euro/dollar. But for the rest of the year we definitely see the euro gaining the upper hand," said Tobias Thygesen, senior analyst at Danske Markets in Copenhagen.

"Data out of the U.S. has been mixed to say the least, while the data out of the euro area has been very positive and not even euro zone finance ministers could find themselves in a position to say that rates shouldn't go up given the strong euro," he added.

By 1031 GMT the euro was down 0.2 percent on the day at $1.3302, off an earlier 20-month high of $1.3367 . It is within a few cents of its 2004 record peak of $1.3667.

The euro hit a record high above 154.10 yen before falling back to 153.95. The dollar was up 0.25 percent at 115.57 after hitting a four-month low below 115 on Friday. Sterling was off last week's 14-year high against the dollar, trading at $1.9773 . The dollar slid to its lowest since March 2005 against a basket of currencies <=USD>.


In line with recent upbeat data from the euro zone, the Sentix index on Monday showed that investor sentiment improved in December, with the current situation judged to be at its best since the survey began in February 2003.

Although French ministers have called for vigilance over the euro's rise, they have not been joined by counterparts from other euro zone states or by central bankers, prompting investors to conclude that $1.40 rather than $1.30 was now the key level that would make officials uncomfortable.

ECB President Jean-Claude Trichet is speaking later in Madrid.

"He is likely to express discomfort with the speed of recent euro gains. However, on levels we believe he will be relatively more sanguine," JP Morgan said in a note to clients.

The European Central Bank is expected to raise rates to 3.5 percent this week. Some predict more tightening later, although a recent surge in the euro has slightly dampened this view.

Japanese officials are also calm as a weaker yen helps exports. Japan's top financial diplomat Hiroshi Watanabe said he was not concerned about yen carry trades, adding that the market will decide on euro/yen exchange rates.

Currently, Eurodollar futures imply that traders expect the Fed to cut rates by up to three quarter-points by end-2007.

© Reuters 2006. All Rights Reserved


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