Dollar Drops vs. Euro, Yen as Growth Outlook Cut

The dollar fell to a one-month low against the euro Wednesday and touched a one-week trough versus the yen after the Federal Reserve lowered its growth estimates for 2008.

The euro rose to $1.5781 before retreating back to $1.5772. The dollar was down 0.4 percent at 103.12 yen after going as low as 103.07 yen.

The Federal Reserve cut its forecast for economic growth in 2008 and warned of higher inflation and unemployment. But it also signaled it was unlikely to cut interest rates again soon.

In an accompanying forecast, the Fed cut its projection for economic growth to scant 0.3 percent to 1.2 percent in 2008, down from 1.3 percent to 2 percent it estimated three months ago.

At the same time, the central bank said it expects inflation to remain "elevated" and unemployment to increase "significantly."

Fed officials believed that cutting benchmark interbank lending rates by a quarter percentage point to 2 percent at their last meeting was "a close call."

The comments come as oil prices continue to surge to new highs, increasing Europe's inflation fears and also denting the U.S. growth outlook and the dollar.

"With oil reaching $130 a barrel, the stronger data adds to the complications for the ECB," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. "They are most likely on hold, but their mandate is price stability, so if inflation moves higher, they are more likely to hike than to cut."

The greenback was also down against its Canadian counterpart, with the loonie boosted by high oil prices and a gain in April Canadian consumer prices.

While Canada's CPI was higher than expected, the country remains "much better positioned than other major economies, where inflation is outside the central bank target zone," Sutton said.

In contrast to burgeoning speculation of an ECB rate hike, bets on a Federal Reserve tightening before the end of the year have faded over the last few days.

Fed Vice Chairman Donald Kohn said on Tuesday that rates appear to be at the right level for now, though he did stress uncertainty about the future.

The ECB has held rates at 4 percent since last June.

Sutton said the market appears to be embracing anew a weak dollar bias that should persist until a shift in data tilts interest rate differentials back in the greenback's favor.

Some said that might come from softer euro zone data.

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