Dollar at 1-Month High vs. Euro as ECB Move Looms

The dollar rose Tuesday, soaring to a one-month high against the euro as data showed a sharp narrowing in the U.S. trade deficit and investors braced for a European Central Bank interest rate cut later this week.

Demand for the greenback firmed after a government report showed the trade gap narrowed by the most in 12 years last month, driven by a plunge in imports.

"The theme of the day is really a broad-based dollar rally,'' said Kathy Lien, director of currency research at GFT Forex in New York. "There are a number of reasons for that, the primary being the stronger trade balance number that we had this morning that renewed some optimism in the U.S. dollar.''

The euro fell below $1.32 for the first time since mid-December, weighed down by a bevy of weak economic data from the 16-country euro zone and the threat of credit ratings downgrades for several euro-zone countries.

Traders said that means the ECB is likely to cut its main interest rate from 2.5 percent when it meets on Thursday.

"You can look at virtually any euro zone country's data and see that the economic growth story is not looking good,'' said Dustin Reid, senior currency strategist at RBS Global Banking & Markets in Chicago.

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This, coupled with broader concerns about the economic health of Britain and Eastern Europe, "is not helping the euro or sterling and the Swiss franc on the margins,'' Reid said.

In late New York trading, the euro slid over 1 percent to below $1.32 after earlier hitting a one-month low of $1.3141, according to Reuters data.

Markets expect the European Central Bank to cut interest rates Thursday by at least 50 basis points, which would put the key rate at 2 percent.

"The slowdown in the euro area appears increasingly severe,'' said Todd Elmer, strategist at Citigroup in New York. ''The perception is policy-makers are not doing enough.''

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The dollar last traded unchanged at above 89 yen after trading in a band of 88.80 yen and 89.88 yen in the global session.

Sterling fell more than 2 percent to near $1.44 while the New Zealand dollar plunged over 4 percent to near $0.55, a one-month low, after Standard & Poor's warned that it could downgrade the country's foreign currency rating.

The news on New Zealand "just highlights the global nature of the current downturn and the risks to global growth,'' said Robert Blake, senior currency strategist at State Street Global Markets in Boston.

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Fears about the global outlook kept risk appetite subdued despite Wall Street's modest push into positive territory on Tuesday. International Monetary Fund Managing Director Dominque Strauss-Kahn's warning Tuesday the IMF would likely cut its growth forecasts sharply also weighed on sentiment.

An additional sting to the single European currency came as Spain became the third euro zone member, along with Ireland and Greece, to be warned by S&P that its sovereign credit rating is under threat.

S&P's warning on Spain triggered a widening in intra-euro zone government bond spreads, driving some yield premiums over benchmark German bunds to their biggest margin on record.

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