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Tuesday December 5, 2006 - 21:30:12 GMT
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FOREX-Dollar rebounds after jump in services report

FOREX-Dollar rebounds after jump in services report
Tue Dec 5, 2006 4:21pm ET146

(Updates prices, adds comment)

By Steven C. Johnson

NEW YORK, Dec 5 (Reuters) - The dollar rebounded against the euro and sterling and pared losses versus the yen on Tuesday after a report showing the U.S. service sector grew at its fastest pace since May countered signs of slower growth.

The rise in November service sector activity surprised the market, which expected a much weaker reading after a recent spate of soft U.S. data, including a report showing factory output last month contracted for the first time in 3-1/2 years. For details, see [ID:nWEN0738]

The latest data put the brakes on a sharp dollar slide that began in late November and cast doubt on views the Federal Reserve will cut interest rates in early 2007.

"I think this number pretty much squashes any chance of a serious dollar sell-off before the (November) nonfarm payrolls data on Friday and will probably restrain volume," said Alan Ruskin, chief international strategist at RBS Greenwich Capital, in Greenwich, Connecticut.

Late afternoon, the euro had moved back to $1.3324 , near the prior session's closing level, after having slipped to $1.3288 after the data. It hit a 20-month high at $1.3367 on Monday.

Sterling was well off a 14-year peak above $1.98, falling 0.3 percent on the day to $1.9737 .

The dollar has lost about 3 percent of its value over the past couple of weeks amid a flurry of soft U.S. data and expectations of higher interest rates in the euro zone and falling interest rates in the United States. Continued...

Forex Capital Market strategist Boris Schlossberg said the market was "grossly oversold" and said Tuesday's services report created a near-term "ceiling" for sterling and the euro, the two biggest gainers against the dollar.

ABN Amro currency strategist Greg Anderson pointed out in a note to clients that European firms' need to hedge net investment exposure to the dollar has caused the euro to rally in November and December in five of the past six years, only to surrender those gains in January and February.


The dollar trimmed losses against the yen to 114.80 yen , down nearly half a percent on the day but above a four-month low at 114.44 yen.

The yen was also up 0.4 percent at 153.01 yen per euro after Bank of Japan policy board member Atsushi Mizuno said it would be wrong to assume the central bank needed to wait until all economic indicators were strong to raise interest rates again.

Japanese rates at 0.25 percent have kept the yen under pressure and facilitated carry trades in which investors borrow cheaply in yen to buy higher-yielding currencies.

Softer data from Japan has dimmed expectations of a BOJ rate rise this year. But O'Sullivan said the yen's exchange rate, along with uncertainty over the strength of the U.S. economy, is another wild card complicating things for currency traders.

"There are a lot of people long dollar, short yen, and if they start to unwind those carry trades, you're going to see the dollar fall to 111 or 112 yen pretty quickly," he said.

The next key U.S. data comes on Friday, when the market will get a look at U.S. employment growth in November. The median estimate of a Reuters poll of economists calls for a net gain of 110,000 jobs, above 92,000 in October.

(Additional reporting by Vivianne Rodrigues and Kevin Plumberg in New York)

© Reuters 2006. All Rights Reserved.


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