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Dollar weakens against euro, yen on speculation of deeper Fed rate cut

Wednesday, January 9, 2008

The US dollar weakened against the euro and yen in afternoon session in Asia on Thursday as investors bet the Federal Reserve may cut its key rates by as much as half a percentage point this month to prevent a recession.

The rising number of jobless Americans, declining consumer spending and continued weakness of the housing and financial sectors, which has spilled over into other industries, are heightening fears that the US economy would soon be in a recession. AT&T on Tuesday warned that slumping economic growth had led to a slowdown in its consumer businesses.

Goldman Sachs yesterday said in a note to clients that the world's largest economy may enter a recession "very shortly".

"There is an intense debate surrounding the size of the rate cut that's keeping the dollar unsettled," said Thomas Lam, treasury economist at United Overseas Bank. "The market seems to think that there is a 70 percent chance of a 50 basis point rate cut this month."

At 1 pm (0500 GMT), the euro was trading at 1.4680 dollars, up from 1.4658 in Sydney this morning. The dollar was quoted at 109.77 yen, down from 109.95.

The Federal Open Market Committee will meet on January 30 to decide on interest rates.

Investors will be closely watching the address later today by Fed Chairman Ben Bernanke about the US economic outlook and financial markets for any clues on interest rates.

Next week, Bernanke will also be appearing before the US House of Representatives, Lam said.

Later today, the European Central Bank (ECB) and the Bank of England (BoE) will be announcing the results of their respective meetings.

"Until we get clear statements from the ECB and the BoE, the market will remain edgy," said Lam.

He said there is a risk that the BoE may cut interest rates for a second month after a 25 basis point reduction last month. Most analysts were expecting the two central banks to keep their rates steady.

The yen will probably weaken against the dollar, while the euro will likely firm up versus the greenback towards the end of this quarter, Lam said.

The Fed lowered its rates by a cumulative one percentage point in September and December and United Overseas Bank is forecasting another 50 basis point rate cut in the current quarter.

Elsewhere, the Australian dollar was buying 88.36 US cents, up from 88.28 US cents last night as stronger-than-expected November retail sales boosted the chances for an interest rate rise next month and commodities prices moved higher.

Australia's trade deficit narrowed to a seasonally adjusted 2.25 billion Australian dollars in November from a revised 2.86 billion dollars in October after export earnings recovered from two months of negative readings, economists said.

Posted by MOHAMED SAID at 11:39 PM  

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