Dollar slides as U.S. outlook sours

Reuters
Monday May 07, 2007

The dollar slipped on Monday ahead of three central bank meetings that may underscore market expectations for U.S. interest rates to fall this year as rates in other major economies climb higher.

While the Federal Reserve is seen holding rates at 5.25 percent after its meeting on Wednesday, analysts say officials may concede signs of slower U.S. growth after recent data revealed anemic job growth in April, causing the dollar to drift lower.

The Bank of England, meanwhile, is seen lifting rates to 5.5 percent on Thursday, a move that would put British interest rates above those in the United States for the first time since January 2006.

The European Central bank is expected to hold its rates steady at 3.75 percent on Thursday but signal a hike in June.

"The market is fully prepared for the Fed to be on hold and will focus on the verbage of the statement for any suggestion of further dollar downside," said Charmaine Buskas, FX analyst at Moody's Economy.com in West Chester, Pennsylvania.

The greenback lost ground against all the major currencies on Monday, though a public holiday in Britain thinned out trade and kept losses modest.

The euro was last trading at $1.3604, up 0.1 percent from late Friday, and near a lifetime high above $1.3680.

Analysts said Nicolas Sarkozy's victory in the French presidential election provided modest support.

"With Sarkozy's policies aimed at making the labor market more flexible and promoting market oriented policies to improve economic growth, his win is supportive of the euro," strategists at BNP Paribas wrote in a note to clients.

The dollar was down 0.2 percent at 120.02 yen while sterling edged up 0.1 percent to $1.9937.

The Canadian dollar was the biggest mover on the day, rising to an 11-month high against its U.S. counterpart after Alcoa Inc. (AA.N: Quote, Profile, Research announced a $27 billion hostile bid for Canadian rival Alcan (AL.TO: Quote, Profile, Research. Dollar/Canadian dollar last changed hands at C$1.1023.

U.S. IN FOCUS

Analysts said slower U.S. growth at a time when other major economies are moving full steam ahead should keep the dollar under pressure.

But while U.S. consumers have so far continued to spend, retail sales data due on Friday are seen of particular importance.

"Everyone is expecting euro-dollar to hit $1.40 in the next month or so, but if the consumer continues to spend without restraint, that certainly helps keep the dollar supported," said Ezechiel Copic, FX analyst at IDEAglobal in New York.

Alternatively, any signs of a downturn in spending will hurt the dollar.

"Deterioration in the housing market and gasoline price pressures have the market looking for signs that the consumer is retrenching," said Economy.com's Buskas.

Until then, the euro could make a run at its record high against the dollar if the Fed on Wednesday emphasizes growth risks while downgrading its assessment of inflation risks.

A Reuters poll showed that the soft jobs data reinforced Wall Street's view that the Fed will cut rates this year.

The median forecast of 18 primary dealers who took part in the survey was for the fed funds rate to stand at 5.0 percent at the end of December, just a quarter-percentage point below its current level.