|Thu Nov 29, 2007 6:33 AM ET|
(Changes byline, adds quotes, updates prices)
By Toni Vorobyova
LONDON, Nov 29 (Reuters) - The dollar rose broadly on Thursday as investors bet that the likelihood of more U.S. interest rate cuts will help avoid a recession and attract more dollar-positive inflows into the U.S. equity market.
Traders said moves were exaggerated by low liquidity, with some currency investors -- especially those who are in profit for 2007 so far -- showing reluctance to take new positions.
Expectations of a Federal Reserve rate cut next month and of more to come in 2008 got a boost on Wednesday after Fed Vice Chairman Donald Kohn said that renewed financial market turmoil could slow the U.S. economy more abruptly than thought.
The dollar sold off in the immediate aftermath of the comments, but subsequently markets took the view that lower U.S. rates might not necessarily be a bad thing for the currency, especially if they boost equity markets.
The Dow Jones industrial average <.DJI> posted its biggest percentage gain in nearly five years on Wednesday, with foreigners snapping up dollars in order to invest.
"I think the market will move towards another 50 basis points (cut) but counter-intuitively that's probably helped (the dollar)," said Adam Myers, market strategist at Credit Suisse.
"If we do get another 50 basis points that will really placate money markets and it may placate equity markets as well. If that is the case... the dollar will do well into January and then it will start to weaken again."
By 1056 GMT the dollar was up 0.7 percent against a basket of major currencies at 75.594 <.DXY>, moving away from the record low of 74.712 struck last week.
Overstretched positioning in the dollar, which has in recent weeks scaled historic troughs against a number of currencies, made it particularly vulnerable to a correction, analysts said.
DOLLAR NOT OUT OF THE WOODS YET
The euro was down two-thirds of a percent at $1.4733 -- more than two cents below last week's record highs <EUR=>.
But Myers at Credit Suisse said the euro's rally would likely resume in 2008, taking it to $1.52 in the second quarter as the dollar will be "without any yield advantage and still with the serious credit problem".
In the shorter term, negative sentiment on the dollar could resurface in case of a weak reading from the U.S. October new home sales data at 1500 GMT.
"In 2007 new home sales have already plunged 25 percent," said ING in a note to clients. "In the next few months, with sales conditions unlikely to improve significantly if at all we expect new home sales to reach fresh multi-years lows."
Thursday's calendar also features a revised reading of third quarter economic growth at 1330 GMT and a speech by Fed Chairman Ben Bernanke at 2300 GMT.
The Fed slashed overnight lending rates by a half-percentage point in September and by a further quarter-point in October, bringing them to 4.5 percent. The central bank next meets on Dec. 11 and is seen cutting them to 4.25 percent.
The Bank of England is widely seen as the next major central bank to follow the Fed down the rate-cutting path -- a view which was reinforced on Thursday by a fresh batch of soft housing data, putting pressure on sterling <GBP=>.
In Sweden, any expectations of rate hikes were doused in cold water by weaker than expected economic growth data, sending the crown to 2-1/2 month low versus the euro <EURSEK=>.