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Dollar recovers on technical buying

Reuters | September 26, 2007
Gertrude Chavez-Dreyfuss

The dollar bounced off fresh record lows versus the euro on Wednesday, after recent losses attracted some buyers even though overall sentiment remained bearish.

Recent U.S. economic data on housing and consumer confidence continued to support expectations of a U.S. interest rate easing next month. Such a cut, coming after last week's 50-basis-point reduction in the fed funds rate, would further tarnish the appeal of dollar-denominated assets.

The interest rate futures market has almost fully priced in chances the Federal Reserve will cut rates by one-quarter point at the October 30-31 policy meeting.

The dollar held near 1992's all-time low against a basket of six major currencies, despite recovering some losses on profit-taking.

"This is still about dollar weakness. We're at this stage where we're getting new highs, but there is no real momentum that's helping it," said Divyang Shah, chief strategist, at Commonwealth Bank of Australia.

Market participants say the euro's gains versus the dollar may be excessive as it has climbed nearly 4 percent this month. But many anticipate that dollar weakness is likely to continue in the near term.

"Markets are concerned about a correction in the euro. But the correction hasn't really happened. It's shallow and that suggests dollar weakness ... will continue, with narrowing rate differentials and the U.S. housing downturn still the things to watch," Shah said.

The euro rose as high as $1.4162 before easing back to $1.4126 by 0944 GMT, down slightly on the day. The dollar index was at 78.522 (.DXY: Quote, Profile, Research) after sliding to a 15-year low of 78.213 on Tuesday -- within reach of the all-time trough of 78.19 set in 1992.

Against the yen, the dollar rose 0.4 percent to 115.15, pulling away from the day's low around 114.50 yen, as Japanese mutual funds bought the dollar and other foreign currencies to get overseas assets.

The euro traded at 162.64 yen, near a six-week high hit late last week.

The Norwegian crown softened versus the euro and the dollar before an interest rate decision due at 1200 GMT. Analysts are split on whether the Norges Bank will hold rates at 4.75 percent or raise them 25 basis points.

The Swiss franc, meanwhile, showed little reaction to a higher-than-expected KOF index. The dollar was up 0.3 percent at 1.1696 francs.

MORE EURO GAINS

Traders expect the euro to continue its climb even as concerns grow that a global credit crunch, triggered by defaults on U.S. mortgage debt, may hit the European economy as companies and consumers find it harder to borrow.

"We are still contrasting very weak U.S. numbers with reasonably firm euro zone ones which gives a good reason for selling the dollar," said Mitul Kotecha, head of global FX research, at Calyon, noting that although the German Ifo business sentiment index fell to a 1-1/2 year low in September, historically it remained at elevated levels.

In light of volatility in financial markets and the Fed's rate cut, most economists polled by Reuters expect the European Central Bank to keep rates at 4.0 percent until the year-end, and earlier expectations of a 25 basis point rise by then have dwindled.

Hungry for more hints on the scope of sluggishness in the U.S. economy, investors awaited a weekly reading of the U.S. mortgage market and durable goods orders for August. Forecasts are for a 3.1 percent fall in orders last month.

The latest catalyst for dollar bearishness were economic reports on Tuesday showing U.S. consumer confidence falling to its lowest in nearly two years and existing home sales posting their smallest year-on-year growth in 5 years.

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