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Thursday October 18, 2007 - 20:58:20 GMT
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FOREX NEWS-Dollar drops to new low vs euro as on US rate view


Thu Oct 18, 2007 4:16pm EDT

(Updates prices, adds comment)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 18 (Reuters) - The dollar fell to a record low against the euro and a basket of currencies on Thursday, pressured by soft U.S. economic data and sluggish corporate earnings that bolstered chances of an interest rate cut.

Bank of America's (BAC.N: Quote, Profile, Research) poor third-quarter earnings on the back of mounting credit losses took their toll on the currency market early as it fanned concerns that the global liquidity crunch is far from over. It also strengthened the case for a cut in the target federal funds rate from the current 4.75 percent to avert a sharper slowdown.

U.S. short-term rate futures on Thursday showed a 68 percent implied chance of a rate cut at the Fed's next monetary policy meeting on Oct. 30-31. Futures now price fully a half-percentage-point's worth of cuts by mid-2008.

"Rate cut expectations have shifted quite significantly. As recently as Monday, expectations for a rate cut were around 35 percent, now it's about 70 percent," said Kathy Lien, chief FX strategist at "That is predominantly the reason why the U.S. dollar is weaker."

The Philadelphia Federal Reserve business activity survey was the latest report to provide evidence of a slumping U.S. economy. For details see [ID:nN18417318]. Earlier in the session, higher-than-expected initial weekly U.S. jobless claims also gave the dollar a negative tone. [ID:nN18331664]

Both reports followed dire U.S. housing data on Wednesday, suggesting the slowdown is deeper than many initially thought.

In late afternoon trading, the euro was up around 0.6 percent on the day at $1.4294 <EUR=>, after climbing to a lifetime peak at $1.4310 in the opening hours of the New York session, according to Reuters data.

The dollar index, a measure of the dollar's value against six major currencies, was down 0.7 percent at 77.590 (.DXY: Quote, Profile, Research). Earlier, it fell to 77.478, the lowest since its post-Bretton Woods inception more than 30 years ago. It was the largest one-day percentage drop in the index since Sept. 28.

The yen, on the other hand, gained as investors became more risk-averse and unwound carry trades in which they buy high-yielding currencies funded by borrowing low-yielders such as the yen.

It was the yen's fourth straight day of gains against the dollar, the longest streak since the four days leading up to the Fed's surprise half-percentage-point cut in the discount rate, at which it lends to banks, on Aug. 17.

The dollar was 0.8 percent weaker at 115.68 yen <JPY=>, near an earlier two-week low. The euro fell 0.2 percent against the yen to 165.37 yen <EURJPY=>.

The dollar was already weak before the release of the Bank of America's earnings, still reeling from the effects of weak housing data the previous session.

"The combination of further U.S. housing woes and disappointing earnings at (Bank of America) raises the downside risks for the U.S. economy," said Ashraf Laidi, chief currency analyst at CMC Markets USA in a research note.

Foreign exchange investors are also cautious ahead of a Group of Seven meeting over the weekend. European businesses on Thursday urged France, Germany, and Italy to push for a clear commitment from the G7 group of rich industrial nations against further euro appreciation.

But few analysts were willing to bet any action will be taken to address the euro's surge against the dollar.

"The reality is that currency volatility (in the euro) has fallen significantly from the spikes seen in mid-August," said Calyon in a research note.

On the U.S. side, the bank believes that dollar weakness will not be mentioned in the statement at all given its limited impact on inflation.

"Given that there is little sign of imported inflation pressure at present, it gives further reason for the U.S. not to act in any form of concerted intervention," Calyon bank said.

Analysts said the G7's focus is more likely to be on the tightly controlled Chinese yuan currency.

(Additional reporting by Nick Olivari)

© 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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