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Monday July 9, 2007 - 10:24:55 GMT
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FOREX NEWS-Payrolls bounce eludes dollar as rate view weighs

FOREX-Payrolls bounce eludes dollar as rate view weighs
Mon Jul 9, 2007 6:13AM EDT

(Changes byline, updates prices, adds quotes)

By Jamie McGeever

LONDON, July 9 (Reuters) - The dollar slipped on Monday as last week's surprisingly strong U.S. jobs data failed to sway investors from the notion the Federal Reserve will stand pat on interest rates while other central banks tighten policy further.

Although short-term interest rate spreads did move in the dollar's favour after Friday's non-farm payrolls data, the trend in recent weeks has been one of narrowing spread advantage for the dollar over major European currencies.

This, together with elevated oil prices, helped keep the dollar on the back foot on Monday despite the jobs data, analysts said.

"The key, in our view, has been the nominal tightening of spreads since mid-June. And while there was a mild widening after the payrolls, it hasn't been anything too dramatic," said Trevor Dinmore, currency strategist at Deutsche Bank in London.

The yen had earlier fallen to a record low against the euro and its weakest in over a decade versus sterling and the Australian dollar. But it recovered after Japanese vice finance minister Hideto Fujii said the economy is firm, something that should be reflected in exchange rates.

Still, investors' appetite for carry -- selling low-yielding currencies for higher-yielding units -- is likely to prevent the yen from rebounding too much.

The U.S. dollar's broad weakness, albeit within relatively narrow trading ranges, was most apparent against the Canadian dollar, which hit a 30-year peak against the greenback on widespread expectations the Bank of Canada will raise rates a quarter point to 4.5 percent on Tuesday.

At 0945 GMT the euro was flat at $1.3631 , half a cent from its record high above $1.3680 struck in April, while the dollar was flat against the yen at 123.30 yen .

The euro was also flat against the yen at 168.07 yen , having earlier reached a fresh peak of 168.54 yen, according to Reuters data.

CARRY STILL IN PLAY

The U.S. dollar was down around a quarter percent against the Swiss franc and sterling , and a third of a percent down on the day against the Canadian dollar .

Oil prices eased back on Monday but remain at elevated levels above $70 a barrel. Together with hawkish expectations for the BoC this week, this helped push the greenback to a 30-year low of C$1.0445.

FX strategists at RBC Capital Markets reckon the BoC's statement will point to further rate hikes this year, as will its monetary policy review update later in the week.

"We continue to see the risks to USD/CAD as to the downside as the market prices in only two further hikes this year, including tomorrow's. RBC economists continue to expect a total of three 25 bp hikes," they wrote in a research note on Monday.

Absent a heavy slew of major U.S. economic data this week, the BoC rate decision and statement could take on more significance for FX markets than it otherwise might have done.

Traders are also taking stock of last Friday's payrolls data, which showed that 132,000 jobs were created in June, beating the consensus forecast of 120,000 in a Reuters poll.

But this did little to alter the market's belief that the Fed will keep rates pinned at 5.25 percent until the end of the year.

High oil prices and steady growth are expected to keep the European Central Bank on its tightening path, while the BOJ will likely lag all other central banks bar the Fed, even if it does hike rates from 0.5 percent some time this year.

"Carry trades will continue. From an interest rate perspective and from a capital flow perspective, there are good reasons for the yen to remain weak," said Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm.

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