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Wednesday July 18, 2007 - 10:58:56 GMT
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FOREX NEWS-Dollar down on subprime woes, eyes on Bernanke

FOREX-Dollar down on subprime woes, eyes on Bernanke

(Changes byline, updates prices, adds quotes)
By Simon Falush

LONDON, July 18 (Reuters) - The dollar slid to a 12-year low against a basket of major currencies on Wednesday, hurt by fears that troubles in the U.S. housing sector could necessitate rate cuts at a time when other central banks are tightening policy.

The dollar also fell to a fresh all-time low versus the euro and hit a 26-year trough versus sterling, pressured by news that Bear Stearns had said two of its hedge funds that bet heavily on subprime loans had "very little value".

With yield differentials in focus, investors are looking for further clues on the U.S. rates outlook from U.S. consumer prices data for June at 1230 GMT and congressional testimony by Federal Reserve Chairman Ben Bernanke at 1400 GMT.

Any comments from Bernanke on troubles in the subprime mortgage market -- which caters for borrowers with a troubled credit history -- could be key.

"The focus will be on Bernanke's comments," said Tom Levinson, FX strategist at ING.

"He won't be able to ignore the subprime issue and he is likely to say the economy can cope with it but investors will look to see if comments pop out under questioning that could scare the market."

Against a basket of six major currencies, the dollar fell as low as 80.227 (.DXY: Quote, Profile, Research) -- the weakest since April 1995.

The euro climbed to a historic high of $1.3833 before trimming gains to stand at $1.3784 by 1001 GMT.

Sterling rose as high as $2.0548 , according to Reuters data -- its strongest since 1981 -- ahead of Bank of England minutes earlier in the session.

Sterling pared some of these gains after the minutes showed three of the Bank's nine-strong Monetary Policy Committee voted against a July rate hike, in line with expectations but perhaps not the aggressive vote to raise rates some had expected in the light of Tuesday's firm inflation data.

The dollar was flat against the yen at 122.13 .

The Australian dollar jumped to an 18-year peak of US$0.8786 after Reserve Bank of Australia Governor Glenn Stevens said he was not surprised by the Aussie's strength.

The Canadian dollar set fresh three decade peaks against the greenback ahead of Canada's inflation data at 1100 GMT.

Many analysts expect U.S. dollar weakness to continue.

"The dollar is under pressure, that's the story. Spreads are moving against the dollar and it's only a matter of time before we hit $1.40 in euro/dollar and $2.06 in (sterling/dollar)," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

The implied spread between December eurodollar and Euribor futures has fallen to 74 basis points in favour of the dollar now from 87 basis points a month ago, while U.S.-euro zone government bond yield differentials have also compressed.

The dollar suffered a blow after Bear Stearns (BSC.N: Quote, Profile, Research) made the announcement about its two hedge funds in a letter to investors on Tuesday, giving a boost to Treasuries in Asia trade. [ID:nN17260293]

Wednesday's data could add to the dollar's troubles.

Core U.S. consumer prices are seen rising 0.2 percent in June, keeping the annual rate of inflation stable at 2.2 percent. Headline inflation though -- which includes rises in food and energy costs -- is expected to pick up to 2.4 percent.

With the spotlight on the U.S. housing market, June building permits and housing starts figures will also be studied.

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