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Thursday October 18, 2007 - 10:52:47 GMT
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FOREX NEWS-Growing chances of Fed rate cut hurt dollar

Thu Oct 18, 2007 6:44am EDT

(Updates prices, adds quotes and comment, changes byline)

By Toni Vorobyova

LONDON, Oct 18 (Reuters) - The dollar slipped towards record lows against a basket of currencies on Thursday, after another bleak reading of the U.S. housing market increased speculation the Federal Reserve will cut interest rates again.

The ultra-low yielding yen, meanwhile, got a bit of a boost as a lacklustre performance in European equity markets and nervousness ahead of a Group of Seven meeting at the weekend kept investors wary of entering yield-seeking carry trades.

Data on Wednesday showed that U.S. home starts last month tumbled to a 14-year low.

Traders' shifting expectations back toward the Fed cutting rates as soon as Oct. 31 were compounded by the Fed's "Beige Book" snapshot of U.S. economic activity which showed growth across the country broadly slowing.

"The market is focussing on the rising probability of a (Fed) cut at the end of this month. We've had some very poor (U.S.) data in the last couple of days, and as that filters through, the dollar is coming under broad pressure," said Derek Halpenny, senior currency economist at BTM-UFJ.

By 1025 GMT, the euro was up around 0.35 percent on the day at $1.4253 <EUR=>, closing in on its lifetime high of $1.4281, according to Reuters data.

The euro was a touch weaker against the yen at 165.50 yen <EURJPY=>, while the dollar was 0.4 percent weaker at 116.13 yen <JPY=>, near earlier two-week lows.

Sterling got a boost from above-forecast British retail sales data <GBP=> while the Swiss franc rose after Swiss National Bank chairman Jean-Pierre Roth said on Wednesday that markets were wrong to assume there would be no further rate hikes <CHF=>.

DOVISH ON FED, CAUTIOUS ON G7 The dollar index, a measure of the dollar's value against six major currencies, was down half a percent at 77.757 (.DXY: Quote, Profile, Research). Earlier this month, the index fell to 77.66, the lowest ever since its post-Bretton Woods inception over 30 years ago.

The U.S. housing data Wednesday was the latest piece of evidence that suggests the Fed may lower rates this month from 4.75 percent to cushion the economy from slowing growth.

U.S. short-term rate futures early on Thursday showed around a 90 percent chance of a rate cut by the end of the year, up from as low as roughly 50-50 on Monday.

But nervousness ahead of this weekend's meetings between Group of Seven finance ministers and central bankers in Washington, and continued close monitoring of equity and oil prices could arrest the dollar selling.

European businesses on Thursday called for France, Germany and Italy to push for a clear commitment from the G7 on further euro appreciation.

"The market is likely to be a little nervous ahead of the G7 meeting tomorrow but if there are no major changes to the communiqué's language on FX, as we expect, euro/dollar is likely to make fresh highs next week," Barclays Capital said in a note. Some investors were also nervous in selling the yen before the meeting, amid some concerns that policymakers could highlight the weakness of the Japanese currency.

Analysts though said the G7's focus was more likely to be on the tightly-controlled Chinese yuan.

Chinese central bank governor Zhou Xiaochuan said on Thursday he had sent a delegation to European Union officials after EU raised concerns about the yuan.

© 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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