FOREX-Dollar pauses after rally, eyes on bailout vote

Fri, Oct 3 2008, 10:10 GMT
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LONDON, Oct 3 (Reuters) - The dollar took a breather on

Friday but was still poised for its biggest weekly gain in 16

years after a tumultuous week that saw the European Central Bank

moderating its tone on inflation risks.

The market was also cautious ahead of U.S. non-farm payrolls

data due at 1230 GMT and the hoped-for passage of a $700 billion

financial industry bailout package through the House of

Representatives later in the day.

Demand for the dollar from banks and financial institutions

shut out of frozen money markets have helped propel the

greenback up nearly 4 percent versus a basket of major

currencies this week, despite the fact that the United

States is the epicentre of the global financial crisis.

"The one place where there is relatively functioning and has

relatively normal liquidity is in the biggest market in the

world: the spot fx market ... its certainly a factor affecting

the dollar spot rate," said Derek Halpenny, senior currency

economist at BTM-UFJ.

Fears that U.S. banking sector woes are taking root in

Europe following the rescue of a few major European lenders

including Fortisthis week have also hurt the

euro.

These events have prompted the ECB, which left rates

unchanged at 4.25 percent on Thursday, to open the door for its

first rate cut in more than five years with President

Jean-Claude Trichet saying inflation risks have eased as

financial market turbulence hit the euro zone.

"In this kind of market where the momentum is very much

against the euro, it obviously reinforces the momentum when

you've got the ECB signalling a rate cut," Halpenny said.

"But in an environment where we're seeing a rapid decline in

inflationary concerns and where we're going to have pronounced

disinflationary forces in the global economy next year, the

currency markets are unlikely to be punishing central banks for

cutting rates."

At 0757 GMT, the dollar index, which gauges its

performance against a basket of six major currencies, was down

0.2 percent at 80.327, but still within easy reach of the

one-year peak of 80.794 hit in the previous session.

The euro rose 0.3 percent on the day to $1.3854,

having plumbed a 13-month trough of around $1.3743 on Thursday.

Against the yen, the single currency was flat at 145.60 yen , but held above a two-year trough of 144.56 yen

touched earlier.

The dollar eased 0.2 percent to 105.10 yen.

BANK SQUEEZE

The squeeze in interbank lending -- which has driven

three-month dollar Libor rates up a full percentage

point in two weeks to more than double the Federal Reserve's 2

percent rate target -- is a major factor behind the dollar's

gains, analysts say.

A slew of economic data this week showing the U.S. economy

has likely fallen into a full-blown recession has done little to

take the wind out of the dollar's rise, even as the Fed is seen

likely to cut rates as well this month.

But the key U.S. jobs report, which is expected to show the

world's biggest economy shed 100,000 jobs in September with the

jobless rate steady at 6.1 percent, may help bring market focus

back to fundamentals, giving dollar bulls pause for thought.

"We see risks of a weaker outcome. If delivered, US dollar

outperformance may well be checked," said ING strategist Tom

Levinson, who is expecting a drop of 150,000 jobs and an

unemployment rate of 6.5 percent.

(Additional reporting by Eric Burroughs in Tokyo, editing by

Mike Peacock)

Keywords: MARKETS FOREX Currency bid prices at 0801 GMT. All data taken from Reuters with percent change calculated from the daily U.S. close at 2130 GMT. Last US Close % Chg YTD % 2007 02 Oct. Close ----------------------------------------- Euro/dlr 1.3851 1.3816 +0.25 -5.06 1.4589 Dlr/yen 105.01 105.34 -0.31 -5.68 111.33 Euro/yen 145.43 145.52 -0.06 -10.52 162.53 Dlr/swiss 1.1318 1.1361 -0.38 -0.15 1.1335 Stg/dlr 1.7711 1.7652 +0.33 -10.76 1.9847 Dlr/cad 1.0780 1.0798 -0.17 +8.19 0.9964 Aus/dlr 0.7764 0.7719 +0.58 -11.34 0.8757 NZD/Dlr 0.6623 0.6572 +0.78 -13.61 0.7666 Euro/swiss 1.5680 1.5698 -0.11 -5.19 1.6539 Euro/stg 0.7820 0.7829 -0.11 +6.41 0.7349 Euro/sek 9.6994 9.7043 -0.05 +2.85 9.4304 Dlr/Nok 5.9973 5.9952 +0.04 +10.35 5.4347 Latest forex developments All forex news ... Debt...Indicators... Currency reports.. All spots Tokyo spots Europe spots Volatilities Tokyo Forex market info from BOJ World central bank news Economic Forecasts... Official rates... Forex Diary....... Top events........ Diaries...........Diaries Index........ Press Digests.... Polls on G7 economies..

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