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Wednesday April 18, 2007 - 21:33:59 GMT
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FOREX NEWS-Dollar dives to 26-yr low vs pound on rate prospects

FOREX-Dollar dives to 26-yr low vs pound on rate prospects
Wed Apr 18, 2007 5:09pm ET144

(Updates prices, adds comment)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 18 (Reuters) - The dollar fell to a 26-year low against the British pound and traded near a record low versus the euro on Wednesday, as expectations for U.S. interest rate cuts contrasted with prospects for monetary tightening in Europe and Japan.

The greenback later turned slightly higher against the pound, as investors booked profits on sterling's recent gains.

"There's been a slight dollar (selling) pullback. I think some major levels have been touched upon so we're seeing some profit-taking on short dollar positions," said C.J. Gavsie, managing director for FX sales at BMO Capital Markets in Toronto.

Late in the session, however, the Australian dollar rose to a fresh 17-year high against the U.S. dollar at US$0.8389 .

"Interest rate expectations remain the fundamental driver in this market," which should weigh on the U.S. dollar, Gavsie said. BMO is looking for a slight increase in Japanese rates, hikes from the European Central Bank and Bank of England, and mostly steady to lower rates in the United States in coming months.

For the rest of the week, analysts expect dollar weakness to remain the dominant theme since there are no major market-moving U.S. economic data due.

The pound, which rose above $2 on Tuesday for the first time since 1992, on Wednesday scaled levels last seen in June 1981. In that year, the pound had fallen sharply from a peak above $2.40 hit in January 1981.

Sterling rose as high as $2.0133 on expectations the BoE will raise interest rates by at least 25 basis points to 5.5 percent in May, which would top the U.S. federal funds rate. It last traded at $2.0064, slightly lower on the day.

The euro also slowly approached historic highs versus the dollar, rising above $1.3600 for the first time in two years and coming within 60 ticks of record peaks set in December 2004.

By late afternoon in New York, the euro was up 0.3 percent at $1.3605, but down from its peak of $1.3616 .

Demand for the dollar dwindled after Tuesday's data showed tamer-than-expected U.S. consumer price inflation for March, excluding food and energy. The data contrasted with a jump in British consumer prices, which stoked expectations for a rate hike.

Investors also continued to shift funds to the euro after the ECB kept rates unchanged at 3.75 percent last week but suggested it was likely to tighten credit in June or beyond to stem higher inflation.

By contrast, most economists expect the Fed to cut its benchmark rates sometime this year, even though the U.S. central bank has reiterated its main concern remains price pressures.

"The dollar has basically underperformed the euro and that's continuing because it's all about where interest rates going in the near term," said Kathy Lien, chief currency analyst at in New York.

The yen, which has suffered recently along with the dollar due to its low-yielding status, pulled back from a record low against the euro as investors took profits on short positions.

Investors have used the yen as a funding vehicle for carry trades, which involve selling a low-yielding currency to invest in higher-yielding assets.

The dollar fell about 0.2 percent to 118.68 yen . The euro traded little changed at 161.30 yen , pulling back from a record high above 162.40 yen hit this week.

But investors began buying back the high-yielding currencies such as the New Zealand and Australian dollars, as well as sterling against the yen in the afternoon session.

"The market is not giving up on carry. Today we saw a lot of the yen crosses start the morning off significantly weaker, but now we've seen some of the high-yielders reverse their declines," said Lien of DailyFX. (Additional reporting by Vivianne Rodrigues)

© Reuters 2007. All Rights Reserved.


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