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Euro on Track for Worst Week Since June 2006

Reuters
Friday, 8 Feb 2008 | 12:03 PM ET

The euro recovered a little Friday but was on track for its biggest weekly fall versus the dollar in 1-1/2 years amid growing expectations the European Central Bank will cut interest rates later this year.

Dollar and Euro
Dollar and Euro

The ECB kept its key interest rate at 4 percent on Thursday, but President Jean-Claude Trichet dropped a threat to act preemptively against rising prices and accepted that unusually high uncertainty in markets may hurt the economy.

Investors were reluctant to take big currency positions before a weekend meeting of Group of Seven finance officials in Tokyo. The summit may yield some comments on currencies, though foreign exchange is not expected to take center stage.

"It became clear this week that the economic slowdown has been moving East and that Europe is not insulated," said Mark Meadows at Tempus Consulting in Washington D.C. "The euro suddenly came under pressure and it may continue so for a while."

By late morning in New York, the euro was up , but down almost 2 percent since Monday. Against the yen, the euro was up .

Trade was relatively quiet, with many Asian players away for the Lunar New Year break. Financial markets in Tokyo will be closed on Monday for a national holiday.

The dollar was little changed against the yen .

Some analysts said a shift from carry trades -- in which investors fund purchases of higher-yielding currencies by borrowing in low-yielding units such as the yen -- in favor of currencies whose central banks are cutting interest rates to support growth has not happened yet.

"We continue to favor the dollar this year," said Mansoor Mohi-uddin, a currency strategist at UBS AG said in a note. "Risk aversion will deter U.S. investors from buying overseas assets and interest rate cuts in the rest of the world will ease the dollar's cyclical undervaluation,"

Sterling was up 0.2 percent versus the dollar, recovering some of Thursday's losses sustained after the Bank of England cut rates by 25 basis points to 5.25 percent and signaled it would likely stick with a path of gradual monetary easing.

Although the euro is now about 5 cents -- or 3 percent -- below last November's record high versus the dollar, it is still more than 10 percent higher than a year ago. On the ECB's trade-weighted basis, it is holding just below all-time peaks set in January.

Many European officials have expressed concern about the euro's strength, with French Trade Minister Henri Novelli saying Friday that lower interest rates in the region would help companies struggling under the impact of a stronger currency. This view has been backed by weak export data from France and Germany.

However, European officials are not expected to secure the support of the other Group of Seven countries for some kind of joint statement on the euro's strength or dollar's weakness.

"The reality in fact is for a re-run of October's communique, i.e. no explicit mention of major currencies but calls for yuan flexibility to increase. A greater focus will be put on the risks to global growth," ING said in a client note.

A G7 source said discussions on foreign exchange rates will be less important this time than those on policy responses to the deteriorating international economic climate.

In October, the finance ministers stressed the need for an accelerated appreciation of the Chinese yuan while repeating that excess volatility and disorderly movements in exchange rates are undesirable for economic growth.

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