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Tuesday April 17, 2007 - 20:54:08 GMT
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FOREX NEWS-Dollar weakens as sterling tops $2, yen shines

FOREX-Dollar weakens as sterling tops $2, yen shines
Tue Apr 17, 2007 4:47pm ET145

(Adds comments, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 17 (Reuters) - The dollar dropped to a two-year low against the euro on Tuesday after data showed U.S. core consumer prices rose less than expected in March, bolstering expectations the Federal Reserve may be more inclined to cut interest rates this year.

The dollar also fell against the yen and sterling, which rose above $2 for the first time in almost 15 years as UK inflation data cemented expectations the Bank of England will raise rates next month.

Tuesday's economic releases renewed worries among investors the U.S. economy may be slowing, compared with solid growth in other regions such as Europe and Asia, analysts said.

"The negative dollar sentiment right now is related to the U.S. economy's potential for further slowdown and therefore rate cuts from the Fed," said David Powell, senior currency strategist, at IDEAglobal in New York.

"We do expect the U.S. to return to trend growth toward the end of the year. But in the meantime, we could be in for a period of sustained dollar weakness and we expect that to be most pronounced against the euro and sterling in the coming days and weeks," he added.

In late afternoon trading, the euro was up 0.2 percent on the day at $1.3564, after touching a two-year high of $1.3595, less than 1 cent below a record high of $1.3670.

The dollar sold off after data showed U.S. core inflation grew just 0.1 percent in March, below market forecasts for a rise of 0.2 percent. In another report, U.S. March industrial output fell 0.2 percent. For details, see [ID:nN17403655].

After the data, the interest rate futures market was factoring in a quarter-percentage-point ease by year-end in the benchmark federal funds rate, currently at 5.25 percent, and was leaning more toward a second cut.

Tough inflation talk from Philadelphia Federal Reserve Bank President Charles Plosser on Tuesday did little to change the view the Fed may have to ease this year to boost a slowing economy.

By contrast, the European Central Bank, although it kept benchmark interest rates unchanged at 3.75 percent last Thursday, has signaled it is likely to raise rates in June or beyond to stem higher inflation.

Against the yen, the dollar fell 0.7 percent to 118.88 yen . The euro dipped 0.4 percent to 161.25 yen .

"We've seen some yen buying. I think we've had a nice trend that went one way and there's been some nice profit-taking going on," said Jeff Gladstein, global head of FX trading at AIG Financial Products in Wilton, Connecticut.

Investors had sold the Japanese currency after the Group of Seven rich nations did not address yen weakness at their meeting in Washington over the weekend. That encouraged investors to put on carry trades, in which investors borrow funds in low-yielding currencies such as the yen to invest in higher-returning assets like sterling.

"At this point, we're just biding some time here," before yen-selling resumes, said Gladstein.

Sterling , meanwhile, was up 0.8 percent on the day at $2.0054, and hit its highest point since September 1992. The pound last hit the $2 level just before Britain exited the pre-euro Exchange Rate Mechanism in 1992.

Earlier on Tuesday, data showed British consumer prices had accelerated at a 3.1 percent annual rate in March, the highest level since comparable records began in 1997. That reinforced expectations for a May interest rate hike in Britain to 5.5 percent, from the current 5.25 percent.

"Sterling's rise to the $2.0 level for the first time since September 1992 is an important landmark in the high-yielding make-up of currency carry trades as well as a key development in the weakness of the U.S. dollar," said Ashraf Laidi, chief FX analyst at CMC Markets in New York, in a research note.

IdeaGlobal's Powell believes the pound could rise further because the market is "not overextended yet." In addition, he said the rate futures market was also pricing in another tightening by the Bank of England to 5.75 percent by end-2007.

© Reuters 2007. All Rights Reserved.


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