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Monday September 24, 2007 - 21:30:45 GMT
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FOREX NEWS-Dollar dips to new low vs euro, hit by rate cut fears


FOREX-Dollar dips to new low vs euro, hit by rate cut fears

Mon Sep 24, 2007 4:15pm EDT

(Updates prices, adds quote)

By Steven C. Johnson

NEW YORK, Sept 24 (Reuters) -The dollar hit a record low against the euro for the third straight session on Monday amid fears that a deepening housing slump could rein in economic growth and trigger more cuts in U.S. interest rates.

Trade was light as attention shifted to existing-home sales and consumer confidence data due on Tuesday.

Investors are worried that weak economic reports will push the Federal Reserve to follow last week's half-percentage-point rate cut with more policy easing, further eroding the dollar's yield advantage over other currencies, particularly the euro.

After last week's cut, U.S. benchmark interest rates stand at 4.75 percent, compared with 4 percent in the euro zone.

"Rate differentials will continue to be the main driver, and as long as we see U.S. data on the weak side markets will expect further Fed easing, putting more pressure on the dollar to weaken," said Paresh Upadhyaya, who helps manage about $29 billion in currency assets at Putnam Investments in Boston.

Several Wall Street firms have downgraded their outlook on U.S. gross domestic product over the next several quarters.

The euro was at $1.4088 <EUR=> after earlier hitting a record high $1.4130, according to Reuters data.

Upadhyaya said options barriers around $1.4150 were likely over the coming days to act as "a magnet for the market" as traders try and push the euro through that level.

The dollar traded at to 114.75, down 0.6 percent, below its level late on Friday as investors remained wary of piling back into carry trades, which involve using cheaply borrowed yen to buy higher-yielding currencies and assets.

"There is no enthusiasm to buy the yen in its own right. It is a beneficiary of a flight out of carry currencies, but there is little independent desire to buy yen," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The dollar index, which tracks the dollar's move versus a basket of six currencies, slipped to a 15-year low of 78.313 but subsequently recouped some losses to trade at 78.533.

Traders were keeping an eye on the all-time low at 78.19 struck in September 1992, a level analysts said would provide a test of whether the dollar decline deepens or pauses.

Analysts say the recent sharp declines in the dollar may provide some investors a short-term buying opportunity.

"The U.S. dollar feels quite weak, but I wouldn't be surprised to see some short-term profit-taking, people buying some dollars and selling some euro. But I do not expect it (the euro) to move too much lower than here," said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

Longer term, though, the focus will remain on interest rates and the dollar's dwindling yield advantage.

Interest rate futures are pricing in a roughly 66 percent chance of a 25-basis-point Fed rate cut in October, down from 72 percent at Friday's close. At least one more quarter-point cut has been factored in by year-end on top of any move at the Fed's next meeting in October.

"It's all about interest rates," Askari said. "Once the Fed starts an easing cycle, I don't believe it's ever gone one move and out. I am confident we will have more easing, at least 25 (basis points), probably another following early next year."

Investors overlooked criticism of the European Central Bank from a French presidential aide who said euro strength was eroding European competitiveness and business productivity.

ECB President Jean-Claude Trichet also brushed off the remarks, saying the central bank's main task was to ensure price stability.

(Additional reporting by Lucia Mutikani)

© 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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