FOREX-Dollar falls as Fed cut highlights low yield status

The dollar weakened against the euro and yen on Wednesday, erasing gains made after a smaller-than-expected U.S. interest rate cut the previous day, as dealers maintained their bearish view on the low-yielding currency.

The Federal Reserve lowered its federal funds target rate on Tuesday by 75 basis points to 2.25 percent -- futures markets had broadly expected a full percentage point reduction -- which fuelled a relief rally in equities, tightening of a broad range of spreads and a rebound in the dollar.

The Fed's move gave an extra boost to stocks and broad market sentiment which had already been lifted by earnings reports from Lehman Brothers (LEH.N: Quote, Profile, Research) and Goldman Sachs (GS.N: Quote, Profile, Research). These weren't as gloomy as many analysts had feared, particularly following the near collapse of Bear Stearns (BSC.N: Quote, Profile, Research).

But the dollar's rally fizzled out in Asia. It was unable to hold above 100 yen, while implied volatilities on currency options edged back up as the dollar's bounce drew in sellers who were more worried about the currency's meagre yield and U.S. economy's bleak prospects.

"The Fed (cut) was a little bit less than what people were expecting although it gave some comfort to equity markets ... but the dollar is back under pressure again and that's reflective of the uncertainty over the U.S. economic outlook and the systemic risk (in the banking system)," said Phyllis Papadavid, currency strategist at Societe Generale in London.

"The dollar is losing its status as a safe-haven currency, and to the extent that these (financial market) uncertainties persist, the yen and Swiss franc will continue to benefit. Our bias is still to be short the dollar and recommend being short the dollar," she said.

Forex - Dollar sheds post Fed gains

The dollar has shed most of yesterday's gains in the wake of Wall Street's sharp rally following the US Federal Reserve's decision to lower its benchmark interest rate by three quarters of a percentage point to 2.25 pct.

After the Fed's rate cut, which was slightly less than the market consensus for a full 100 basis point reduction, the Dow Jones index of leading US shares enjoyed its best day in five years, helping the US currency to rally too. The euro fell down towards the 1.56 usd mark while the dollar climbed back above 100 yen.

'This rally hasn't been sustained and there's already a bit of a hangover after yesterday's celebrations creeping in,' said James Hughes, analyst at CMC Markets.

'It's going to be a case of simply sitting back and seeing just how far the major crosses do unwind now and whether there is any net effect of the rate news, but so far saving that quarter percent for a later cut is looking as if it may be little more than a very brief shot in the arm,' he added.

The Fed's accompanying statement proved to be more hawkish than many had expected. It showed that the Federal Open Market Committee (FOMC) was divided, with two of the ten governors favouring 'less aggressive action.'
The Fed also indicated that it was giving increased attention to elevated inflation levels, thereby signalling that an end to the current rate cut cycle was fast approaching.

Antje Praefcke, currency strategist at Commerzbank Corporates & Markets, said the Fed's stance is unlikely to comfort markets for too long, given the ongoing uncertainty in credit and financial markets, despite good quarterly results yesterday from Goldman Sachs (NYSE:GS) and Lehman Brothers. (NYSE:LEH)

'It will take months before light is expected at the end of the write downs and revaluations tunnel and the flight into quality is likely to continue for the time being,' said Praefcke. 'Therefore, we think that the Swiss franc and the yen as well as the euro will push higher against the dollar.'
Analysts said renewed concerns about the credit crisis and the related economic damage are likely to set in again soon
Elsewhere, the pound will be in focus this morning when the Bank of England releases the minutes to the last meeting of the rate-setting Monetary Policy Committee and the statistics office releases the latest labour market report.

Bank watchers expect the Committee to have voted 8-1 to keep interest rates on hold at 5.25 pct in early March with David Blanchflower seen as odds on to have dissented and called for a cut.

If more vote for a cut, then the pound could be hit hard.

'This has the potential to weigh on sterling,' said Steve Pearson, chief currency strategist at HBOS.

Regarding the labour market report, sterling markets will be interested to see if there is a negative surprise. So far, employment levels have remained high despite signs of an economic slowdown elsewhere.

'In the case the labour market report comes in weak, the pound will immediately head south,' said Hans Redeker, global head of FX strategy at BNP Paribas.

Oil prices hit new high above 111 dollars

Oil prices soared to new highs above 111 dollars in Asian trading Monday as the US currency slumped to another fresh low against the euro.

New York's main contract, light sweet crude for April delivery, briefly traded at a new high of 111.42 dollars before easing to 111.08 dollars.

New York oil prices closed at 110.21 dollars during US trading hours on Friday, a day after hitting 111 dollars for the first time.

'The US dollar's weakness remained a supportive factor for the oil price in US dollar terms,' said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney.

Brent North Sea crude for May delivery was up 80 cents to 107 dollars. The April contract expired Friday at 107.54 dollars.

Oil prices are likely to trend higher after the euro rose to a fresh high above 1.59 dollars Monday for the first time, while the US unit dropped below 96 yen to a new 12-year low.

'We can continue to expect strong prices for oil and commodities like gold in the near term,' said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.

The record-breaking spree in recent weeks was fuelled by investors rushing into commodities including oil, which they see as a safe haven amid rising concerns over the US economy and financial turmoil from a credit squeeze.

The ailing greenback has helped drive up oil prices because crude is priced in dollars and becomes more affordable for buyers holding stronger currencies.

Investors view oil futures as a hedge against inflation and the weak dollar.

Oil prices have rocketed by 90 percent over the past year as the market was driven by tight supplies, geopolitical concerns in key producer nations and fierce demand for crude from China and India.

Prices have gained about 9 percent in value since the start of 2008, accelerating after the OPEC oil cartel held output at current levels at a meeting in early March.

Dollar drops to fresh record low against euro, 12-yr low versus yen

The US dollar slumped to a new low against the euro and dropped to a 12-year low against the yen in late morning Asian trade on Monday, as investors raised bets that the Federal Reserve will aggressively cut interest rates this week to calm the market.

The Fed will likely cut rates by 75 basis points on March 18, said Tomoko Fujii, head of economic strategy at Bank of America, who raised her forecast from half a percentage point last week.

Some speculators are betting the rate cut will be as much as one percentage point, she said.

'There are a lot of negative factors against the dollar in the pipeline, including a deeper rate cut,' Fujii said. 'That's why it is difficult to stop the dollar's decline.'

At 12.00 pm (0400 GMT), the euro was trading at 1.5848 dollars, after soaring earlier today to as high as 1.5905, its strongest level since the common currency began trading in January 1999.

The dollar was quoted at 96.75 yen, after dropping to as low as 95.75 earlier today, a level not seen since August 1995, according to traders.

The US currency continued its descent versus major currencies after the Fed earlier surprised the market with a 25 basis points cut in its discount rate, the rate at which it lends directly to banks.

Financial markets have roiled recently from the collapse of Wall Street heavyweight Bear Stearns, which has prompted the Fed to step in.

JPMorgan Chase said Sunday it will acquire rival Bear Stearns in an all-share deal valued at 236.2 million dollars, roughly 1 percent of what the investment bank was worth just 16 days ago.

The Fed will provide special financing to JPMorgan for the deal, as the central bank has agreed to fund up to 30 billion dollars of Bear Stearns' less liquid assets.

'The foregoing announcements from the Fed suggest that the committee might be preparing for a larger than normal move in the target fed funds rate on Tuesday or is subtly assessing the reaction in financial markets ahead of the Tuesday meeting or both,' said Thomas Lam, senior treasury economist at United Overseas Bank.

The Fed has slashed its benchmark rates by a cumulative 225 basis points since September to ease the credit crunch stemming from unpaid housing mortgages.

'Investors seem to have taken these moves as evidence of the deepening of the credit crisis, as they do well remember that the previous emergency rate cut by the Fed in late 2007 failed to quell the credit crunch,' NTT Smarttrade director Takashi Kudo said.

'Investors also seem to think that the Fed's action was a little too late and reactive,' he said.

Adding to the gloom, London's Telegraph reported that Goldman Sachs will this week announce asset writedowns worth about 3 billion dollars, its biggest to date.

The bank's 3 billion dollar writedown will be based partly on the declining value of its 4.9 percent stake in Industrial & Commercial Bank of China (ICBC), which is held separately on Goldman's balance sheet, according to the UK newspaper.

FOREX-Dollar nears record low against euro

NEW YORK, March 12 (Reuters) - The dollar fell broadly on Wednesday and neared a record low against the euro as strong euro zone economic data renewed focus on the divergent paths of European and U.S. interest rates.

The greenback had rallied sharply the previous session after the Federal Reserve said it would lend primary dealers $200 billion in Treasury securities and accept a wider array of mortgage debt as collateral to help ease tight credit markets.

But those gains fizzled out in European trade as the dollar plunged by 1 percent versus the yen. The euro soared to $1.5491 , just shy of a record high, after euro zone data showed industrial output rose by much more than expected in January.

That bolstered the view that the European Central Bank need not rush to cut interest rates. The Fed, though, is still seen cutting its benchmark rate at a March 18 meeting despite its efforts on Tuesday to improve financial market liquidity.

"We're getting a reality check today," said Matthew Strauss, senior FX strategist at RBC Capital Markets in Toronto. "The market is realizing that the strength of recent euro zone data suggests the ECB is right to hold rates and focus on inflation."

Meanwhile, he said the Fed's recent move to get money flowing in financial markets "addresses short-term liquidity issues but doesn't address underlying credit concerns and the U.S. housing decline, which have not gone away."

The euro last traded at $1.5475, up 0.9 percent on the day and just below an all-time high of $1.5495. Strauss said a move to the round number of $1.55 could spark some dollar buying but said that was unlikely to be sustained.

Hong Kong shares close higher led by China stocks

Mar. 6, 2008

HONG KONG (XFN-ASIA) - Share prices closed higher led by China stocks following a rebound in Shanghai, with commodities, financials and telecom counters in focus.

Commodity stocks surged after oil and gold prices hit new highs amid the US dollar's weakness, while China banks and insurance firms tracked A-share gains on the mainland.

China telecom stocks extended yesterday's gains after mainland media quoted a Chinese official as saying that the long-awaited sector restructuring could take place in the first half of 2008.

Strong earnings from local blue chips and a positive Wall Street showing also helped the local bourse snap a four-session losing streak, but dealers noted that the index came off the day's highs due to talk that China may raise interest rates.

Ping An Insurance was up 4.6 pct after shareholders approved the company's fund-raising plan, while shipping firm China COSCO surged over 5 pct on hopes of an asset injection by its parent.

The Hang Seng index closed up 228.39 points or 0.99 pct at 23,342.73, off a low of 23,254.31 and high of 23,615.18.

Turnover was low at 69.55 bln hkd.

'While the market ended up today, it's worth noting the continuing drop in turnover and the index's fall in the afternoon session from a 500-point gain at morning close,' said Linus Yip, strategist at First Shanghai Securities.

'Many investors were unwilling to trade and this was amply reflected by the low turnover as they continue to fret about global market uncertainties,' he said.

'Sentiment was also weighed down by rumors that China might raise interest rates in its bid to curb rising inflation,' Yip said.

Credit Swaps Thwart Fed's Ease as Debt Costs Surge

March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.

General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based company sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.

Borrowers from investor Warren Buffett's Berkshire Hathaway Inc. to Germany's HeidelbergCement AG face the same predicament. Yelds on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997.

The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mrtgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent -- a mathematical impossibility, according to UBS AG.

``The credit-default swap market is completely distorting reality,'' said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country's biggest cement maker. ``Given what these spreads imply about defaults, we should be in a deep depression, and we are not.''

Hedging Losses

The problem started in the second half of last year when subprime mortgage delinquencies started to rise, causing investors to retreat from complex instruments such as synthetic collateralized debt obligations, or packages of credit-default swaps that became hard to value. The swaps are contracts based on bonds and used to speculate on a company's ability to repay debt.

As values of CDOs began to fall, banks that had sold swaps underlying the securities started to buy indexes based on them instead, a method of hedging their losses on portions of the CDOs they owned. The purchases are driving the cost of the contracts higher, raising the perception that company bonds tied to the swaps are suddenly riskier and leading investors to demand higher yields throughout the corporate debt market.

The Markit CDX North America Investment-Grade Index, a gauge of credit-default swaps on 125 companies from Wal-Mart Stores Inc. to Walt Disney Co., more than doubled since the start of the year to a record 171 basis points on March 4. The index is up from last year's low of 29 in February. A similar benchmark in Europe rose to a record 139 basis points earlier this week.

Undermining Bernanke

The $1.5 trillion CDO market is undermining Bernanke's attempts to lower borrowing costs. The Fed cut its target rate for overnight lending between banks by 2.25 percentage points to 3 percent since September, and even debtors with the safest ratings are paying more. Money-market rates for euros and pounds climbed to the highest since mid-January yesterday, signaling the global squeeze on short-term bank lending may be returning.

The financing unit of GE, the world's most prolific borrower, sold the 4.875 percent five-year bonds last week at a yield 1.29 percentage points higher than similar-maturity government rates, Bloomberg data show. Last May, the company issued 750 million euros of 4.375 four-year notes at a spread of 0.27 percentage points.

The additional expense stems from credit-default swaps tied to GE's bonds. Their cost climbed to a record 165 basis points on March 4 from 12 points a year earlier, according to CMA Datavision in New York.

FOREX-ECB eyed as euro hits record high beyond $1.53

LONDON, March 6 (Reuters) - The dollar hit lifetime lows versus the euro on Thursday beyond $1.53, with investors looking to the European Central Bank's interest rate decision and news conference later for fresh signals on monetary policy.

While the ECB is seen holding interest rates steady at 4 percent, all eyes are on the bank's president, Jean-Claude Trichet, for hints of a shift in policy that might provide respite for the greenback's broad fall.

The dollar's decline has been exacerbated by weak U.S. economic data and worries about a recession, which has galvanised the U.S. Federal Reserve to cut borrowing costs sharply to 3 percent, with further easing expected to come.

The euro's latest rally has already prompted some concerned comment from policymakers. Investors will scan Trichet's remarks to see if he echoes those.

"There are fears (Trichet) may comment on the euro's rise. If he says anything about sharp or brutal moves or that he's not happy with the euro's strength, it could lead to a fall in the euro," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

By 0932 GMT, the euro had risen as high as $1.5345, the highest since the single currency's inception in 1999 .

The dollar struck an all-time low against a trade-weighted basket of major currencies, with the dollar index falling as low as 73.119 .DXY.

Forex - Pound comes off all-time low against euro after strong services PMI

LONDON (Thomson Financial) - The pound came straight off a fresh all-time low against the euro after a key UK service sector survey came in much stronger than expected, cementing expectations the Bank of England will hold off cutting interest rates tomorrow.

The Chartered Institute of Purchasing and Supply's services PMI jumped to 54.0 in February from 52.5 in February, its highest level since September 2007. Analysts had expected the survey to drop to 52.2.

However the BoE will be alarmed to see the output and input prices sub-index both climbed to their highest level since the survey began, reinforcing their concerns about a strong uptick in consumer inflation over the coming months.

At 9.34 am GTM the euro was trading at 0.7667 stg, having hit an all-time high of 0.7689 stg seconds before the data was released. Against the dollar the pound climbed to 1.9770 usd from 1.9710 usd just before.

Forex - Dollar steady ahead of key US news

03.05.08, 7:59 AM ET

LONDON (Thomson Financial) - The dollar remains steady against the euro ahead of some key US economic data this afternoon and on the eve of an interest rate decision from the European Central Bank.

Earlier, the US currency recovered some ground as traders squared up positions ahead of a raft of US economic data. The euro's move as high as 1.5250 usd during yesterday's session proved short-lived as investors awaited further clues on the health of the US economy and what the Federal Reserve will do at its next rate-setting meeting on March 18.

The most important news today is likely to be the Institute for Supply Management services index for February. Though this is expected to have risen to 47.5 from 44.6, it still remains in contraction territory.

The monthly ADP employment report, a closely-watched gauge of the US labour market, will also be at the forefront of the market's attention.

'If these data show that the credit crunch is starting to affect corporate activity and the labour market more severely than had been expected, the dollar may resume its nosedive,' said Mitsubishi (other-otc: MSBHY.PK - news - people ) UFJ Securities forex manager Minoru Shioiri.

Both the upcoming data and the corporate news may well determine whether the Fed cuts its benchmark funds rate by 75 basis points to 2.25 pct or by 50 basis points to 2.50 pct.

Elsewhere, attention will focus on Thursday's interest rate decision from the European Central Bank.

Though the ECB is unlikely to follow the lead across the Atlantic, there are growing expectations that the central bank's president Jean-Claude Trichet will sound a more dovish tone in his ensuing press conference.

Anything he says about possible intervention to stem the export-sapping rise in the euro will be particularly important to the near-term levels of the single currency.

Both EU Commission and Eurogroup lawmakers have fired warnings about the euro's level in recent days.

'Given the ECB's mandate to ensure price stability and the Fed's willingness to see further improvement in export growth, the risk of unilateral or coordinated intervention to precipitate a euro adjustment against the dollar is low at this stage,' said Ashley Davies, currency strategist at UBS (nyse: UBS - news - people ).

Elsewhere, the pound recovered its poise after a key survey into the services sector saw output growth accelerate and price pressures elevated.

Analysts said the prospect of another imminent rate cut from the Bank of England is likely to diminish further by the news that output in the UK services sector unexpectedly rose during February.

The survey from the Chartered Institute of Purchasing and Supply also showed that price pressures in the sector, which accounts for over two-thirds of UK GDP, are at their highest since records began more than a decade ago.

'The combination of faster growth and stronger price pressures shown in February's CIPS report on services undoubtedly supports the case for the MPC to be cautious about how quickly it cuts interest rates,' said Vicky Redwood, economist at Capital Economics.

Despite the sharp rise in the CIPS index, the euro is still trading near its new all-time high of 0.7689 stg.

Markit in Talks With Banks on Index Tied to Auto-Loan Bonds

March 5 (Bloomberg) -- Markit Group Ltd., the owner of benchmarks for the $45.5 trillion credit-derivatives market, plans to start an index that would allow investors to bet on securities backed by auto loans, people with knowledge of the plan said.

Lehman Brothers Holdings Inc., Morgan Stanley, Bear Stearns Cos. and Merrill Lynch & Co. are among the firms in talks with New York-based Markit to create the index, said the people, who declined to be named because the discussions are preliminary. The index would be linked to debt backed by auto loans from issuers such as Detroit-based GMAC LLC and Ford Motor Credit Co.

The Markit index would be the first benchmark allowing investors to speculate on the credit quality of securities backed by auto loans in the same way they use indexes to bet on subprime and commercial mortgages. Those indexes plunged in the past seven months as subprime mortgage defaults rose to records, sending investors fleeing to safer assets such as U.S. government debt.

``The notion of an index linked to auto-loan securities makes sense because it will allow investors to short the consumer,'' said Jeff Salmon, portfolio manager at Bank of New York Mellon, which has $500 billion in assets under management.

Markit spokeswoman Teresa Chick in London declined to comment. Spokespeople for Lehman, Morgan Stanley, Bear Stearns and Merrill Lynch, all in New York, declined to comment.

Slowing Economy

Credit-default swaps are based on bonds and loans and used to speculate on a borrower's ability to repay debt. They were conceived to pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to debt agreements.

Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

The auto index would act as a credit-default swap contract and would be linked to bonds backed by auto loans and offer protection if the securities aren't repaid as expected, in return for regular insurance-like premiums.

Delinquencies on prime auto loans in securities issued in 2006 rose 18 percent compared with 2005 and exceed the ``historical highs'' of 2001, Standard & Poor's said in a report Jan. 22. Yields on three-year, AAA rated bonds backed by auto loans trade at 140 basis points more than benchmark rates, up from 75 basis points at the start of the year, according to Deutsche Bank AG data.

Forex - Dollar gets some respite ahead of US economic news

03.05.08, 3:40 AM ET

LONDON (Thomson Financial) - The dollar recovered some ground as traders squared up positions ahead of a raft of US economic data.

The euro's move as high as 1.5250 usd during yesterday's session proved short-lived as investors awaited further clues on the health of the US economy and what the Federal Reserve will do at its next rate-setting meeting on March 18.

'Many are now looking for the ISM services index and ADP payroll survey today for near term direction, whilst the non-farm payrolls on Friday will also be keenly awaited,' said James Hughes, analyst at CMC Markets.

'The crunch point is going to be if the credit crisis of last year is seen to impact elements of corporate activity and if this is indeed the case then the greenback may well find itself under renewed pressure in the near term,' he added.

Both the upcoming data and the corporate news may well determine whether the Fed cuts its benchmark funds rate by 75 basis points to 2.25 pct or by 50 basis points to 2.50 pct.

Elsewhere, attention will focus on Thursday's interest rate decision from the European Central Bank.

Though the ECB is unlikely to follow the lead across the Atlantic, there are growing expectations that the central bank's president Jean-Claude Trichet will sound a more dovish tone in his ensuing press conference.

Daragh Maher, senior FX strategist at Calyon, said he will be looking at tomorrow's press conference to see if there are any hints about intervention to stem the export-sapping rise in the euro.

'The likelihood is that the market will become progressively de-sensitised to the chatter if there is no meaningful threat of action,' said Maher.

'Tomorrow's ECB meeting will be the next port of call to see how potent the intervention threat becomes,' he added.

FOREX-Yen gains broadly as risk aversion rises

Tue Mar 4, 2008 9:30am EST

NEW YORK, March 4 (Reuters) - The yen rose on Tuesday as weaker global equities encouraged investors to unwind carry trades, while the euro paused against the dollar after European officials voiced concerns about its latest rally.

Fears of a recession in the United States stemming from the subprime mortgage crisis have hammered the dollar, driving it to successive record lows against the euro and pushing it close to the psychologically important 100-yen mark.

"The yen is benefiting from risk aversion, which is the weakness in the equity markets across the globe. The second is the interest-rate compression between the dollar and the yen is starting to become very substantial," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.

Investors often borrow in the low-yielding yen to buy high-yielding currencies and assets. In periods of uncertainty, they tend to unwind these trades, boosting the Japanese currency.

In New York morning trade, the dollar was down 0.2 percent at 103.04 yen , after dipping to three-year troughs of 102.59 yen the previous session.

"As it gets closer to the 100 (yen) level you are going to see more speculative flows coming in, trying to test the Bank of Japan to see if they are willing to intervene at this point," said Schlossberg.

Remarks by Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, that the euro was overvalued against other currencies, halted the common currency's five-day run of record highs versus the dollar.

Forex - Euro edges higher as dollar recovery loses momentum

03.04.08, 8:18 AM ET

LONDON (Thomson Financial) - The euro edged higher against the dollar as the US currency's recovery overnight began to lose momentum.

The dollar had gained after both European and Japanese officials expressed concern about the recent sharp rises in their currencies against the US unit. Market players, however, are sceptical about the prospect of actual intervention to prop up the dollar, while there are still no fundamental reasons to buy the US currency.

'It is very difficult to make any case for the dollar to strengthen at the moment,' said Robert Howard at Thomson IFR Markets.

'The ECB will have to actually intervene or to surprise the market with an interest rate cut on Thursday,' he said.

In this respect, Thursday's interest rate decision by the European Central Bank -- where rates are fully expected to be left at 4.00 pct -- and president Jean-Claude Trichet's accompanying press conference will be closely watched, particularly for any comments by Trichet on the euro, Howard said.

The other factor to consider is whether there is any consensus within Europe on a need for intervention, particularly from Germany, while rate-setters may consider that a strong currency will help keep inflation down.

Speaking late yesterday, euro group president Jean-Claude Juncker said current exchange rates do not reflect economic fundamentals and that excessive volatility is not desirable for growth. He tempered these comments this morning, however, by saying the real economy is not being hurt by the euro's strength.

European Central Bank Governing Council member Guy Quaden meanwhile called on the US to reiterate that it favours a strong dollar, while Japanese officials warned about the strong yen's impact on consumption and company earnings.

Among other currencies meanwhile, the Canadian dollar was steady ahead of the Bank of Canada rate decision this afternoon.

The currency came under pressure yesterday after very weak GDP data increased speculation that the BoC could opt for a 50 basis point rate cut.

FOREX-Euro's run of record highs halted by Juncker comments

LONDON, March 4 (Reuters) - The euro halted its five-day run of record highs versus the dollar on Tuesday after European officials voiced concerns about the sharp rise of the common currency.

Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, said on Monday the ministers and European Central Bank President Jean-Claude Trichet had discussed exchange rate policy and agreed to express concerns about excessive moves.

However on Tuesday he seemed to slightly soften his stance, saying he sees no general harm to the economy from a strong euro and it is not wise to have targets for the exchange rate.

"I think that's a step in the direction of becoming more worried about the euro. Still it seems that he (Juncker) softened those comments this morning," said Johan Javeus, FX strategist at SEB in Stockholm.

"The market hasn't completely re-evaluated the situation based on these statements, but they have taken the edge off some of the euro strength we've seen recently."

By 1138 GMT the euro was steady at $1.5217 , off the $1.5275 high set on Monday according to Reuters data.

Commodities and inflation

Prices are going up because prices are going up. That seems to be the rationale for $100 oil and (almost) $1,000 gold. As the Federal Reserve pulls the rug from under the dollar in an effort to stave off recession, so investors are buying raw materials as a hedge against inflation.

There are some fundamental factors – supply bottlenecks, resource industry consolidation, Asian demand – underpinning commodities prices. But these cannot explain the recent surge. This is bad news for the Fed. Steep rises in commodities prices make a mockery of the distinction between core and headline inflation, effectively taxing consumers and businesses. Ben Bernanke, the Fed’s chairman, dismisses talk of stagflation.

Forex - Dollar comes off highs after overnight recovery

03.04.08, 4:53 AM ET

LONDON (Thomson Financial) - The dollar edged slightly lower after solid overnight gains as both European and Japanese officials expressed concern about the recent sharp rises in their currencies against the US unit.

While intervention to prop up the dollar is seen as unlikely, officials are increasing the pressure on the US administration to reiterate its strong dollar policy following the recent steep falls against a range of major currencies.

'Both Japan and Europe are becoming increasingly concerned by recent developments in the currency markets and are notably making very deliberate reference to wording from past G7 statements,' said Simon Derrick at the Bank of New York (nyse: BK - news - people ) Mellon.

Speaking late yesterday, euro group president Jean-Claude Juncker said current exchange rates do not reflect economic fundamentals and excessive volatility is not desirable for growth.

European Central Bank governing council member Guy Quaden also called on the US to reiterate it favours a strong dollar.

But attention will now turn to Thursday's interest rate decision and accompanying press conference by ECB president Jean-Claude Trichet, who has repeatedly focused on the risks of rising inflation.

'Any mention of euro strength by ECB President Trichet in the press conference (after the rate decision) is likely to weigh heavily on euro/dollar and euro/sterling,' said Steve Pearson (nyse: PSO - news - people ) at HBOS.

Meanwhile, the yen came off highs across the board after Japanese officials warned of the strong yen's impact on consumption and earnings at companies.

Among other currencies, the Australian dollar recovered slightly after sharp falls overnight. The losses came after the Reserve Bank of Australia raised interest rates as expected but noted the cumulative impact of four interest rate rises since mid-2007 have produced a substantial tightening in credit conditions.

This has raised speculation the central bank may be inclined to adopt a 'wait and see' approach before opting to raise-again.

The Canadian dollar has also remained on the weak side ahead of today's Bank of Canada rate decision, where the chances of a 50 basis point rate cut have increased after data yesterday revealed a sharp drop in GDP growth in December.

'Recent developments in Canada - very soft December GDP data pushing expectations toward a 50 basis point rate cut today - and Australia - a more dovish than expected tilt to the RBA statement last night and weaker than expected December retail sales - have sapped both the Australian and Canadian dollars of some momentum,' HBOS' Pearson said.

Forex - Dollar firmer after Europe, Japan air worries about currencies' strength

03.04.08, 12:54 AM ET

HONG KONG (Thomson Financial) - The US dollar was firmer against the euro and the yen in afternoon trade in Asia on Tuesday after European and Japanese officials aired their concerns about the impact their strong currencies are having on their respective economies.

Luxembourg and Slovenia finance ministers have expressed worries about the rise in the euro, which has risen to record levels against the dollar since last week, while Japan's economic and policy head warned about the strong yen's impact on consumption and earnings at companies.

'The European officials are trying to slow down the rapid appreciation of their currency, which is bad for their exports,' said Mark Wan, chief analyst at Hang Seng Investment Services Ltd.

'But they are not trying to prevent its appreciation because there is no reason why the euro should not continue its appreciation. Economic data coming out of the US is not helping the dollar.'

Last month, the European Commission cut its 2008 growth estimate for its 15-member euro zone area to 1.8 percent from 2.2 percent.

At 1.00 pm (0500 GMT), the euro was trading at 1.5181 dollars, down from 1.5200 in Tokyo this morning. The euro rose to a fresh record 1.5275 dollars in New York trade Monday.

The dollar was quoted at 103.36 yen, up from 103.26 this morning. The greenback touched a three-year low of 102.62 yen overnight.

'The Japanese government should be worried about the strong yen because it will not help their already weak economy,' said Wan. Given its slowing economy, the yen should be trading at the 107-108 levels versus the greenback, he said.

The International Monetary Fund in January lowered its 2008 growth forecast for Japan to 1.5 percent from 1.7 percent previously.

The dollar was also supported by the Institute for Supply Management (ISM) report on Monday showing that the US manufacturing index came in at 48.3 in February -- higher than the 48.1 forecast by Thomson Financial/IFR.

Still, the greenback will remain under pressure because some analysts and traders are speculating that the Federal Reserve will probably slash its interest rates by up to 75 basis points on March 18, said Wan.

The euro may reach another record of 1.55 dollars, he said.

The Fed has trimmed its rates by a cumulative 225 basis points since September to stimulate the US economy reeling from rising jobless rate, falling consumer spending, higher inflation and a slumping financial and housing sectors.

Investors are now waiting for the release of the ISM service sector index on Thursday and the non-farm payrolls data, due out Friday, for fresh clues about the US economy and interest rates.

'Depending on the outcome of the ISM service sector report and non-farm payrolls data, the dollar may quickly resume its downtrend and test the 100 yen level,' said Mitsubishi UFJ Securities foreign exchange manager Minoru Shioiri.

The market is bracing for more US interest rate cuts after Philadelphia Federal Reserve president Charles Plosser said overnight that the spike in US inflation is 'worrisome, but also highly uncertain', suggesting the Fed hopes weaker growth will diminish price pressures.

Plosser said he does not believe the US is in a recession, but that the economy will experience 'very slow growth' in the first half of the year.

London shares outlook - higher as NY closes off lows, earnings news focus

03.04.08, 1:59 AM ET

LONDON (Thomson Financial) - Leading shares look set to open higher as Wall Street closed overnight off lows with earnings news a likely focus as Admiral Group and Schroders report in the blue chips.

Spread bettors IG Index expect the FTSE 100 index to open up 23 points at 5,843 after closing off 65.7 points at 5,818.6.

Overnight in the US, Wall Street closed narrowly mixed after initially falling in early trade as investors wrestled with record-high commodities prices and data that pointed to a continually weakening economy.

The Dow Jones industrial average -- after slumping more than 100 points briefly during afternoon trading -- finished down 7.49 points to 12,258.90.

Separately, the Standard & Poor's 500 index rose 0.71 points to 1,331.34, while the Nasdaq composite index fell 12.88 to 2,258.60.

Stock markets across Asia were mixed following the lackluster session on Wall Street, the Nikkei 225 index closed up 0.10 points at 12,992.28, while the Hang Seng index was down 155.89 points at 23,429.08.

Elsewhere, oil prices edged higher in Asian trade as traders focused on the weak US dollar and news that OPEC would keep output steady.

New York's main contract, light sweet crude for delivery in April, gained 18 cents to 102.63 usd a barrel from 102.45 usd in New York on Monday.

London's Brent North Sea crude for April delivery rose 22 cents to 100.70 usd a barrel.

Turning to the blue chips, UK motor insurer Admiral Group may be in the spotlight today as it is expected to report a 17 pct increase in full-year profit today, buoyed by steady growth in customer numbers thanks to competitive pricing.

Admiral, which sells motor insurance direct to consumers through the

Admiral, Bell, Diamond and Elephant.co.uk brands, will deliver a 2007 pretax

profit of 172.4 mln stg, up from 147.3 mln in the previous year, according to an

average analyst forecast supplied by the company.

Elsewhere, fund management groups maybe a focus with Schroders expected to report a 28 pct increase in full-year profit today, helped by steady growth in the core asset management division on the back of buoyant stock markets in the first half of 2007.

Meanwhile, Cable & Wireless is not expected to announce any major restructuring plans including the oft-rumoured demerger when it addresses investors today, although there will be an update on the turnaround in Europe and more light shed on its prospects in Jamaica and across the international business.