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U.S. Dollar Nears 20-Month Lows Ahead of Interest Rate Decisions

cnbc.com
Monday, 4 Dec 2006 | 11:35 PM ET

The U.S. dollar held near 20-month lows against the euro on Tuesday as traders took stock ahead of interest rate decisions outside of the U.S. this week that may widen the gap between rates in the U.S. and elsewhere.

The dollar has also fallen to 14-year lows against sterling and four-month lows versus the yen after soft economic data that suggests the Federal Reserve will have to trim rates next year as the economy slows.

The euro has garnered additional support from expectations that the European Central Bank will bump up rates to 3.5% on Thursday, and some economists predict another hike in early 2007.

A period of consolidation seems due given the speed of the dollar's fall. The U.S. currency lost around 3% in value against the euro in less than two weeks.

However, in an interview with CNBC Asia's "Market Watch" Callum Henderson, head of Forex Strategy for Standard Chartered Bank said, "The bias is definitely lower. Unless we get very strong payroll numbers or strong inflation data, that bias is going to remain in place.". Mr. Henderson added that the dollar faces more losses ahead of the year end rather than further consolidation.

In addition to the ECB, looming large on the market's radar are rate decisions this week from the Bank of England, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Other Asian currencies, in particular the Thai baht and the South Korean won have strengthened significantly against the dollar. Central banks in both Thailand and South Korea have been vigilant in trying to slow down the appreciation of their currencies in the face of the weak dollar.

The Bank of Thailand Monday announced tightened restrictions on the supply of baht, which is at eight-year highs. When asked whether these measures would slow down the baht's appreciation, Mr. Henderson felt this was exactly the case, "This should slow down rather than stop or reverse (the baht's appreciation). The trend is still very much in place given that growth in Asia is still very strong and the Thai story in particular is also a pretty good one at the moment."

In late morning Asian trade, the euro stood at $1.3324, though still near the 20-month high of $1.3370 struck on Monday. Sterling stood at $1.9766, in sight of the 14-year peak of $1.9849 marked on Friday. Against the yen, the dollar edged up to 115.37. It hit a four-month low of 114.97 yen at the end of last week. The Thai baht edged higher against the dollar at 35.79.

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