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Tuesday September 11, 2007 - 10:42:35 GMT
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FOREX NEWS-Dollar index plumbs 15-year low, all eyes on Bernanke

  FOREX-Dollar index plumbs 15-year low, all eyes on Bernanke
Tue Sep 11, 2007 6:29AM EDT

(Releads with dollar index at low, adds quotes, changes byline)

By Marek Petrus

LONDON, Sept 11 (Reuters) - The dollar slid to a 15-year low against a basket of major currencies on Tuesday, weighed down by concerns about a sharp slowdown in the U.S. economy that have fuelled expectations of an imminent Federal Reserve rate cut.

Investors were looking to a speech from Fed Chairman Ben Bernanke for validation of market expectations that the Fed will cut its benchmark 5.25 percent rate by at least 25 basis points at next Tuesday's meeting.

The U.S. has been facing a double whammy of rising concerns that credit market problems would dent growth and speculation the Fed could ease by 50 basis points in light of a surprise drop in U.S. employment in August reported on Friday.

A hefty rate cut would erode the dollar's yield advantage, particularly against the euro and the ultra low-yielding yen.

"The markets have been pricing in lower Fed rates for some time. However, concerns over the U.S. economy have intensified, things have become more U.S.-centric," said Mitul Kotecha, head of global foreign exchange research at Calyon.

"It is following Friday's jobs data and I think this is what is leading the dollar lower."

In recent weeks, the dollar has benefited from safe-haven and repatriation flows arising from heightened risk aversion globally. Over recent days, however, poor employment and housing data suggested the U.S. economy will suffer more than elsewhere, undermining the dollar.

The dollar's trade-weighted index (.DXY: Quote, Profile, Research) against six major currencies slipped to a 15-year low of 79.759, taking out a previous low of 79.788 hit on Monday in follow-through selling after the weak jobs data.

The dollar fetched 113.65 yen <JPY=>, holding above Monday's low around 112.60 yen. The euro bought $1.3805 <EUR=>, coming within sight of a one-month high of $1.3816 hit on Monday and July's all-time highs above $1.3850.

Europe's single currency was flat at 156.80 yen <EURJPY=>.

CENTRAL BANK WATCH

July U.S. trade data due at 1230 GMT were expected to show a slight deficit widening to $59.0 billion from June's $58.1 billion (ECON: Quote, Profile, Research).

"With Bernanke's speech looming, the market may be loathe to take aggressive dollar positions on the back of the trade data even if the numbers are far away from expectations," Bear Stearns said in research note.

Bernanke speaks at 1500 GMT in Berlin on global imbalances. Focus was then set to shift to European Central Bank President Jean-Claude Trichet's hearing on the credit crisis in front of a committee in the European Parliament at 1600 GMT.

Some top Fed policymakers have sounded at ease about a rate cut prospect but they struck differing tones on Monday about the depth of the crisis facing the U.S. economy [ID:nN10240083].

In contrast, European central bankers appear to be keeping hawkish feathers on, reiterating their concerns over inflation and signalling the robust economy may warrant further rate hikes once markets return to normal.

ECB Governing Council member Erkki Liikanen told a Finnish newspaper that inflation risks were still to the upside. Executive Board member Juergen Stark echoed this sentiment, saying the ECB has not abandoned rate hikes but is waiting to see how big a toll on growth the current credit troubles take.

The European Commission, the EU's executive, cut this year's euro zone growth forecast by one tenth of a percentage point to 2.5 percent.

Major money markets have suffered strains in the past month, with banks unwilling to lend to each other because of uncertainty about which of them are overexposed to U.S. subprime mortgages extended to clients with poor credit histories.

The ECB drained 60 billion euros ($82.73 billion) of funds from the euro zone interbank overnight lending market on Tuesday to mop up some of the extra cash it provided in recent weeks and bring overnight money market rates back up to its 4 percent target rate. ($1=.7252 Euro)

© Reuters 2006. 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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