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Thursday January 4, 2007 - 11:51:10 GMT
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FOREX-Dollar builds gains; U.S. rate bets seen overdone

FOREX-Dollar builds gains; U.S. rate bets seen overdone
Thu Jan 4, 2007 6:34am ET29

(Changes byline, updates prices, adds quotes)

By Veronica Brown

LONDON, Jan 4 (Reuters) - The dollar built on the previous day's gains versus other major currencies on Thursday, as investors wagered that talk of nearer-term interest rate cuts in the United States was overdone.

A pick up in U.S. manufacturing activity on Wednesday pushed back expectations on the timing of possible monetary easing by the Federal Reserve, putting key U.S. jobs data on Friday and service sector figures later on Thursday in the spotlight.

Dealers said liquidity remained thin as some participants were still absent due to seasonal holidays, exacerbating currency moves.

"People have been buying dollars perhaps on the assumption that talk of rate cuts in the U.S. by the end of the first quarter may have been overdone, that's the fundamental story today," GNI currency strategist Mark Henry said.

"The dollar is a little bit weaker as it has come to the end of the interest rate cycle but it's not an economy that is about to collapse," he added.

The euro eased from Wednesday's record peaks against the yen after an assortment of euro zone numbers came in strong, but not as robust as some had expected -- leaving the euro area rate outlook pretty much intact.

By 1123 GMT, the euro was down half a percent on the day at $1.3103 -- testing support around $1.31. The single European currency had fallen 0.9 percent a day earlier, its biggest one-day decline since the middle of last July.

The dollar was steady at 119.31 yen , but down from Wednesday's 2-1/2 month peak of 119.68 yen.

The euro was almost half a percent down at 156.36 yen after hitting a record high above 158 yen on Wednesday.

The yen still looked vulnerable overall, having fallen to fresh eight-year lows against sterling and nine-year lows versus the Australian dollar this week, dragged down by its low-yielding status.

Even if the BOJ boosts rates this month from 0.25 percent, the yen's weak trend is unlikely to be reversed, traders and analysts said, adding any subsequent hikes would probably be made only gradually.


Euro zone annual inflation in December was unchanged from November at 1.9 percent, according to a first estimate from the European Union's statistics agency

Meanwhile, euro area service sector growth eased, as the RBS/NTC Eurozone services business activity index dipped to 57.2 from 57.6 in November.

Calyon strategists warned against reading too much into the headline service sector figure.

"Overall, we would caution against reading the report too pessimistically as the headline index remains firm, above its October reading, and signifies the 42nd consecutive month that the survey has indicated that the sector is growing," Calyon said in a note to clients.

The European Central Bank is widely expected to raise rates to 3.75 percent in February or March and could tighten again later in the year if growth and inflation stay strong.

In the United States, weekly jobless claims are released at 1330 GMT and the employment component of the ISM December non-manufacturing survey at 1500 GMT will be watched closely ahead of Friday's non-farm payrolls.

On Wednesday, the ADP National Employment Report for December showed the first monthly net job loss in the private sector since 2003.

This lead some traders to speculate that the more closely watched non-farm payrolls could also be softer than expected, which would strengthen the view the Federal Reserve may start cutting rates from the current 5.25 percent.

Minutes from the Fed's December meeting indicated the bank sees increased downside risks to economic growth but inflation remains a dominant concern.

© Reuters 2007. All Rights Reserved


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