Dollar Rises vs Euro on Growth Outlook, Oil Drop

The dollar extended last week's rally and rose versus the euro on Monday as investors assessed how hard the slowdown blighting the U.S. economy would hit the rest of the world.

The euro, which last week suffered its biggest weekly fall since its 1999 inception, almost fell below $1.49, although it recouped some of its losses after European Central Bank council member Klaus Liebscher warned that policy-makers remained focused on taming high inflation.

"Growth outside the U.S. is really slowing and hawkish remarks by the ECB at this point won't have the same impact on the euro as they did one or two months ago," said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto.

Declining oil prices helped ease worries about the impact of higher energy costs on the U.S. economy and also helped boost demand for the U.S. currency.

"No doubt, the drop in oil prices has been helping the dollar," said Strauss. "But there is some resistance in the market to push euro/dollar below 1.50, but if data in the U.S. this week show signs of resilience in the economy, the dollar rally will continue," Strauss said.

He noted that the next key level on euro/dollar is at $1.4928 and a close below that mark could pave the way for a further strengthening of the U.S. currency.

Technical currency analysts at Citigroup also noted that a breach through $1.4908 in euro/dollar "opens the way" for traders to try and test levels as low as $1.4550.

In midday trading in New York, the euro was 0.4 percent lower on the day at $1.4940 . It rebounded from the near six-month low of $1.4908 hit earlier in the session, according the EBS platform.

The dollar index , a measure of the greenback's value against a basket of six currencies, was trading little changed at 76.118  after earlier falling as low as 75.489.

ECB President Jean-Claude Trichet's observation last week that the euro-zone economy was facing tough times confirmed that the rest of the world is not immune to the economic pain the United States is enduring.

"Even if the U.S. isn't getting better very fast, it was always going to be the case that the underlying problems of Europe were going to be emphasized," said Jeremy Stretch, a markets strategist at Rabobank in London. "The theme has to be that the dollar is winning the least-ugly competition."

Other analysts said hawkish comments such as Klaus Liebscher's remarks follow a routine observed in June and July when ECB officials corrected rate expectations.

"We expect others to follow Liebscher, trying to dampen rate cut expectations," currency analysts at BNP Paribas said in a note. "The euro should receive a temporary lift from this side."

Liebscher told the news agency Market New International that inflation risks remained to the upside in the medium term and that there is no room for "complacency" on euro zone interest rates and inflation.

The ECB held rates at 4.25 percent on Aug. 7 after raising them to a near seven-year high in July, but markets have written off the chance of further tightening this year as growth slows.

Oil prices see-sawed and traded as high as $116.90 a barrel  on Monday amid heightened tensions between oil-exporting giant Russia and former Soviet state Georgia. Still, in midday trade crude resumed declines and was last trading lower 1.6 percent lower around $114.

Demand for the Swiss franc rose on news of the fighting between Russia and Georgia. The franc traded near a three-week high of 1.6199 to the euro.

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