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Friday April 27, 2007 - 23:45:16 GMT
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FOREX NEWS-Dollar sinks to record low vs euro after US GDP

FOREX-Dollar sinks to record low vs euro after US GDP
Fri Apr 27, 2007 4:35 PM ET

(Adds comments, updates prices)

By Kevin Plumberg

NEW YORK, April 27 (Reuters) - The dollar dropped to a record low against the euro on Friday after the weakest reading of U.S. economic growth in four years suggested the economy could be at danger of falling behind the rest of the world.

For the first time since its launch in January 1999, the euro rose above $1.3680 and was on track for its largest monthly gain since November.

Against the yen, the euro zone currency climbed to an all-time high above 163 yen, as solid expectations for economic growth in Europe contrasted with the mediocre pace of expansion in the United States and Japan.

Growth in U.S. gross domestic product was below its long-term trend for the fourth consecutive quarter in the first three months of the year, while a measure of inflation posted its largest rise in 16 years. For details, see [ID:nN27230073]

The data did little to shake the view among investors that the Federal Reserve will likely have to cut U.S. interest rates at least once this year, compared with forecasts for higher rates in the euro zone and Britain, among others, thereby reducing the relative appeal of U.S. fixed-income assets.

"The market has been focused on real yield differentials and not inflation," said Steven Englander, head of G10 currency strategy with Merrill Lynch in New York. "You just can't find evidence that higher inflation expectations are good for the dollar."

The euro climbed to a record high of $1.3683, according to electronic trading platform EBS. By midafternoon, it backtracked slightly to $1.3650, but many analysts and money managers said the falling dollar is part of a long-term trend that is not about to end.

The euro also rose to a record high of 163.25 yen in the wake of the Bank of Japan's decision to keep interest rates on hold at 0.5 percent -- the lowest in the developed world -- and to cut their outlook on inflation.

The dollar was largely unchanged against the yen at 119.63 yen , while sterling rose 0.4 percent from late Thursday to $1.9985 . The pound last week jumped to a 26-year high of $2.0134.

One of the biggest movers on the day was the Canadian dollar, which rose to a seven-month high against its U.S. counterpart. The U.S. dollar fell 0.6 percent to C$1.1155 .


The weakening dollar in the face of economic strength in Europe and Asia independent of U.S. demand unearthed the greenback's long-term enemies -- diversification of dollar-denominated central bank and portfolio holdings and concerns about financing the U.S. current account deficit.

"The U.S. is still trying to fund a $200 billion-plus quarterly current account deficit but the new twist is that growth has moved to a sub-2 percent pace," said Brian Garvey, senior currency strategist with State Street Global Markets in Boston.

"This could serve as a wake-up call to foreigners who have recently shown an increasing appetite for U.S. equities and U.S. corporate bonds," he said in a research note.

U.S. financial markets need to attract $3 billion every working day to cover the outflow of money due to the world's largest economy's trade deficit.

Next week, investors will have a steady flow of U.S. economic data to measure the dollar against. In particular, investors will likely focus on the March core PCE price index -- the Fed's favored gauge of inflation -- due on Monday and the monthly payrolls report due on Friday.

Significantly lower-than-expected jobs growth could seal the near-term fate of the struggling U.S. dollar.

"The new kid on the block is the potential for a weak labor market," said a money manager with a large currency overlay manager in London. "There's more dollar weakness to go."

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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