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Dollar gains versus euro

Sunday, January 6, 2008

HONG KONG (Thomson Financial) - The US dollar gained against the euro and the yen in afternoon Asian trade on Monday on optimism the Federal Reserve will adopt measures, including lowering interest rates, to counter fears of a recession.

Fed Chairman Ben Bernanke on Thursday will speak in Washington about the outlook for the US economy and the financial markets which should give investors a clue on the direction of interest rates.

The Fed's Open Market Committee will meet by the end of the month to decide on monetary policy.

"The market will be waiting on Thursday as Bernanke talks about the economy. He may suggest that the Fed will lower interest rates to help the economy," said Mark Wan, chief analyst at Hang Seng Investment Services Ltd.

Lower interest rates usually weaken the greenback because investors would be discouraged to hold dollar-denominated assets as yields decline. But in this case, they may assure investors that the US economy will be able to avoid a recession, thereby lifting confidence in the dollar.

"The market is looking forward to further rate cuts. That will help the economy and the dollar to recover. That's why investors are less pessimistic about the economy," said Wan.

At 1:00 pm (0500 GMT), the dollar was quoted at 108.88 yen from 108.64 in Sydney this morning. The euro was trading at 1.4729 dollars from 1.4748.

The Fed has lowered its key rates by a cumulative one percentage point since September, including a 25 basis point cut last month.

The dollar weakened against major currencies on Friday after the Labor Department reported that the nation's unemployment rate rose to a two-year high in December, while nonfarm payrolls grew less than expected.

Investors covering their short dollar positions also helped the dollar's rebound.

"After the weaker US jobs data we saw a lot of dollar selling. So there are a lot of people who are short of dollars," said David Mann, currency strategist at Standard Chartered Bank.

Investors will also be keeping an eye on this week's meeting of the European Central Bank.

The market is mostly expecting the ECB to keep its key rate unchanged to boost the euro zone economy, though ECB President Jean-Claude Trichet will likely suggest higher rates in the future to curb inflation.

"Heightening risks of a US recession suggest knock-on affects to Europe, and a slower euro-zone GDP growth will likely require a European Central Bank interest rate cut by year-end," said John Kyriakopoulos, head of currency strategy at NAB Capital.

"Still, we expect ECB head Trichet to continue to sound hawkish on interest rates in the near term, although no interest rate change is expected to be announced on Thursday."

The Australian dollar was at 87.27 US cents, after retreating to 87.22 cents by Friday's close, amid reduced expectations for the Reserve Bank of Australia (RBA) to raise interest rates at its first meeting of the year in February.

Posted by MOHAMED SAID at 11:47 PM  

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