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Thursday July 12, 2007 - 21:36:57 GMT
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FOREX NEWS -Dollar slips to new low vs euro on subprime scare

FOREX-Dollar slips to new low vs euro on subprime scare
Thu Jul 12, 2007 4:57PM EDT

(Repeating to remove extraneous content) (Updates prices, adds comment)

By Kevin Plumberg

NEW YORK, July 12 (Reuters) - The dollar dropped to a record low against the euro on Thursday for the third day in a row as the U.S. subprime mortgage market crisis spooked currency investors.

The greenback's decline was broad as well as deep. It tumbled to a 2-1/2-year low against a basket of six major currencies (.DXY: Quote, Profile, Research), largely on concerns that growing problems in the credit market could prompt foreign investors to steer clear of dollar-denominated paper.

Subprime loans are loans made to borrowers with poor credit histories.

"We remain confident in our short dollar strategy as the U.S. subprime story has not run its course," BNP Paribas currency analysts said in a note.

By late afternoon, the euro was up 0.3 percent on the day against the dollar at $1.3785, having set a record high earlier of $1.3799 . The euro-zone single currency also hit a lifetime peak at 168.83 yen , according to electronic trading platform EBS.

"With inflows into U.S. corporate bonds being the most important contributor to funding the U.S. current account deficit, reduced risk appetite for U.S. paper, symbolized by widening swap spreads, will negatively affect the dollar. We believe the key beneficiaries will be the European currencies," the BNP Paribas analysts said.

The dollar fell 0.2 percent to 1.2035 Swiss francs , after falling as low as 1.2006 francs earlier. Sterling was largely unchanged at $2.0310 but did rise to $2.0365 earlier in the day, hitting a 26-year high for the third straight day.

The dollar index was down 0.1 percent at 80.642, having fallen to its lowest in more than two years at 80.545. Separately, the Federal Reserve's trade-weighted index of the dollar against 26 currencies of major U.S. trading partners fell for the fifth straight time to its lowest in a decade.


Stephen Jen, global head of currency research with Morgan Stanley, conceded that he had prematurely called a trough in the U.S. economy in the first quarter of 2007. He said he now believes the euro could rise to $1.40 and sterling could hit $2.07 in the near term.

"The U.S. subprime market continues to contaminate investors' thinking on the relative merits of the U.S. and the rest of the world. Justified or not, investors tend to have the view that this problem will likely remain localized, and funds in the U.S. are more exposed," Jen said.

Against the yen, the dollar was up slightly at 122.45 yen , helped by gains in the U.S. stock market. U.S. stocks advanced on Thursday, drawing support from major retailers which posted surprisingly strong monthly sales figures.

"We've seen the equities market rally, and when that happens, we see people putting on a little more risk," said Brian Taylor, managing director of foreign exchange trading at M&T Bank in Buffalo, New York.

Throughout the day, market chatter was rife about a large investor trying to prevent the euro from reaching $1.3800 because of an options position at that level, dealers said.

Lower-than-expected June U.S. retail sales growth on Friday would almost certainly be the impetus the market needs to push the euro above $1.3800 and closer to the psychologically important $1.40 level.

The market's focus for most of the week has been the dollar's sell-off, especially after reports from credit rating agencies Standard & Poor's and Moody's Investors Service on Tuesday warned of downgrades to billions of dollars in risky mortgage debt.

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