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Dollar Trims Gains vs Euro After US Services ISM

Reuters
Wednesday, 5 Nov 2008 | 10:23 AM ET

The dollar trimmed gains against the euro Wednesday after data showed the U.S. services sector shrank more than expected in October.

The euro moved higher against the dollar, compared with $1.2935 before the data.

The dollar was down against the yen, compared with 98.90 before the release.

Earlier, the dollar inched up against a basket of currencies, supported by weaker European shares as fears of a recession kept risk appetite low, while a decisive win by Barack Obama to become the next U.S. president also bolstered the currency.

The U.S. currency recovered its footing after sliding roughly 2 percent on a trade-weighted basis on Tuesday, but gains were limited as a slide in dollar interbank lending rates showed that tensions in money markets were starting to subside, easing some demand for the currency.

The euro and sterling were pressured lower after dismal figures offered more evidence that their economies continue to weaken, adding to the argument for big interest rate cuts by the Bank of England and the European Central Bank on Thursday.

The dollar initially rallied on the announcement that Democrat senator Obama had won the presidency, and analysts said that a big slump in the euro zone services sector and weak UK output data also helped to prop up the U.S. currency, which suffered steep losses in the previous session.

Dismal economic data pushed European shares 1.6 percent lower on Tuesday, and analysts said that demand for high-risk positions, including assets in euros, sterling and other high-yielding currencies, would remain low as evidence of a global recession continues to mount.

"If we keep getting bad economic data, it will get harder for equities to keep rallying," said Adarsh Sinha, currency strategist at Barclays Capital in London.

"And so it will become more difficult for the dollar and the yen to weaken."

The dollar was up roughly 0.2 percent on a trade weighted basis at 84.782, after falling more than 2 percent on Tuesday.

  • Euro Unlikely to Fight Back Against Dollar
  • Pound Seeing Staying Near Current Lows vs. Dollar

Earlier, the single European currency had climbed as high as $1.2976 according to Reuters charts, boosted after stop-loss orders in the dollar were triggered in the lower $1.2900 region.

A marked fall in Libor rates for dollar funds across the curve had eroded some of the dollar's early gains, as lower rates suggested pressure on banks to scramble for the U.S. currency may be easing.

Weak shares kept risk aversion high and also boosted the yen, which pushed currencies like the euro and the high-yielding Australian and New Zealand dollars as much as around 2 percent lower on the day.

The low-yielding yen continues to benefit from an unwinding in carry trades, which use the Japanese currency to fund purchases of assets in higher-yielding rivals.

ECB, BoE to Cut Rates

A slump in euro zone PMI to a fresh decade low, along with sluggish figures from across the region showed that the service sector remains weak, added to the view that the ECB will cut rates by 50 basis points on Thursday.

A rate cut of 50 basis points or more by the BoE is also anticipated on Thursday after shrinkage in the UK services sector and a surprisingly big fall in manufacturing output bolstered the argument that the economy is in a recession.

Such moves would come after the ECB and the BoE slashed interest rates by 50 basis points last month to 3.75 percent and 4.5 percent, respectively, in a coordinated move.

Analysts said that the ECB will do what is necessary to get back ahead of the rate curve, having long maintained its traditional distinction between prices and the real economy.

ING analysts pointed out that ECB board member Axel Weber -- often considered a policy hawk -- has even "given his blessings" for big rate cuts, while adding that the central bank would likely opt for bolder policy changes than the 25 basis point moves seen during its most recent monetary tightening cycle.

"Past experiences have shown that the ECB prefers large rate cuts during easing cycles," ING wrote in a research note.

"In our view, a 50 basis point rate cut to 3.25 percent is the most likely outcome, but more steps will likely follow. Another 50bp step could already follow in December."

ECB executive board member Juergen Stark told the Financial Times Deutschland that weak euro zone growth and oil price fluctuations could push inflation briefly into negative territory.

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