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Forex - Dollar drops on record oil prices, ECB rate hike expectations

Mon, Jun 30 2008, 09:08 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - The dollar was lower across the board, weighed by surging oil prices and expectations the European Central Bank will raise interest rates later in the week.

The U.S. currency has dropped to a two-month low against the pound, a three-week low against the euro and a 25-year low against the Australian dollar, as rising risk aversion and fears for the U.S. economy came to the fore.

U.S. economic data released this week is expected to come in on the soft side, further undermining expectations the Federal Reserve will raise interest rates in the coming months.

In contrast the European Central Bank is odds-on to lift borrowing costs on Thursday.

"With markets downplaying the risks of actual Fed rate action and the ECB all but certain to raise rates Thursday, the die seems cast for the dollar to lose further ground between now and the ECB meeting," said Gavin Friend, currency strategist at Commerzbank.

Meanwhile, the rise in oil prices -- it hit a new record of 142.61 dollars this morning -- is also weighing on the U.S. currency as fears of stagflation rise in the world's largest economy.

While rising oil prices add to the country's inflation worries, they also add to the chances of a recession.

Hopes had been growing in recent weeks that an end to the country's economic slowdown was in sight, but a recent batch of weak data has added to fears that Thursday's closely watched non-farm payrolls jobs report will come in on the weak side.

"Runaway oil prices and mounting fears that Friday's non-farm payroll figures could disappoint are certainly adding to this downside," said James Hughes, market analyst.

The pound fell back from its earlier high against the dollar, after figures from the Bank of England show activity in the housing market has been slowing rapidly.

The BoE said the number of mortgages approved during May was just 42,000, the lowest number since records begin in 1999 and well below the six-month average of 70,000.

The news followed a survey released earlier in the morning showing UK consumer confidence is at its lowest level since 1990, when the economy was in the grip of a recession.

GfK NOP's monthly consumer confidence barometer fell sharply to -34 in June from -29 in May, as fears of an economic slowdown alongside rising inflation took their toll.

Analysts at BNP Paribas said the pound is likely to come under continued pressure in the coming months as the UK economic outlook continues to deteriorate.

London 0842 GMT London 0500 GMT

U.S. dollar

yen 105.12 down from 106.15

Swiss franc 1.0137 down from 1.0184

Euro

U.S. dollar 1.5831 up from 1.5788

yen 166.48 down from 167.64

Swiss franc 1.6046 down from 1.6077

pound 0.7934 up from 0.7919

Pound

U.S. dollar 1.9952 up from 1.9928

yen 209.74 down from 211.60

Swiss franc 2.0216 down from 2.0293

Australian dollar

U.S. dollar 0.9660 up from 0.9616

pound 0.4840 up from 0.4824

yen 101.61 down from 102.08

rachel.armstrong@thomsonreuters.com

rar/kf1

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