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FOREX-Dollar off 8-month high vs euro, awaits ECB

Thu, Sep 4 2008, 06:08 GMT
http://www.afxnews.com

TOKYO, Sept 4 (Reuters) - The dollar held steady against the euro on Thursday, having come off an eight-month high hit the previous day as investors squared positions ahead of an interest rate decision by the European Central Bank.

Both the ECB and the Bank of England are expected to leave interest rates unchanged when they meet later on Thursday and cut them later this year or next year. The euro and sterling have fallen sharply over the past month on such expectations of monetary easing in the longer term.

In contrast, the dollar has been bolstered by market expectations for the Federal Reserve to raise U.S. interest rates over the next year.

Traders said the dollar was also supported as there had been recent signs of investors pulling money out of emerging markets and parking it in safe-haven U.S. Treasuries.

"Economic conditions are worsening in countries other than those of the dollar and the degree of their deterioration is becoming clearer and clearer," said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ.

The euro was steady from late U.S. trading on Wednesday at $1.4490 <EUR=>, having pulled up from an eight-month low of $1.4385 hit on trading platform EBS on Wednesday.

The euro fell on Wednesday, hurt by a weak reading on euro zone retail sales and data confirming that the euro zone economy saw its first ever quarterly contraction in April-June.

The dollar fell 0.3 percent against the yen to 108.04 yen <JPY=>.

Investors were also also unwinding carry trades, in which they sell the yen to fund investment in higher-yielding assets and currencies, and this supported the Japanese currency on the crosses.

A trader at a Japanese brokerage said the yen looked set to gain on the crosses, but its strength varied by currencies depending on the absolute levels of yields. [ID:nT161517]

WATCHING MONETARY POLICY

Sterling was barely moved at $1.7751 <GBP=D4>, trimming some losses after hitting a 2- year low of $1.7667 on Wednesday.

Highlighting its weakness, sterling touched a record low against the euro of 81.87 pence <EURGBP=D4> on the Reuters dealing system.

Market players are bracing for the BoE to possibly cut interest rates later this year, and for a possible rate cut by the ECB next year.

Traders said the euro could come under pressure if post-meeting remarks by ECB President Jean-Claude Trichet appear cautious towards the outlook for the euro zone economy and underscore market expectations for an eventual ECB rate cut.

Concerns about a slowdown in the global economy seem to be prompting investors to pull money out of commodities and emerging markets, and such flows are probably supporting the dollar, said Hiroshi Yoshida, a trader for Shinkin Central Bank.

"There seems to be a trend of putting money back into the dollar," Yoshida said.

The dollar has risen over the past month even as U.S. bond yields fell, in a possible sign that investors were parking money in U.S. Treasuries, Yoshida said.

The dollar index, which tracks the dollar's value against a basket of six major currencies, was steady at 78.074 <.DXY>, but still hovered near an 11-month high of 78.651 hit on Wednesday.

Sterling fell to a 3- year low near 191.45 yen. <GBPJPY=R> The euro fell 0.2 percent to 156.61 yen <EURJPY=R>, edging back towards a five-month low of 156.26 yen hit on Wednesday.

(Additional reporting by Chikako Mogi; Editing by Chris Gallagher)

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