Sun, Oct 29, 2006 - Page 10 News List

Dollar drops in knee-jerk response to economic data


The US dollar fell to near one-month lows against the euro on Friday on news that the US economy in the third quarter grew at its slowest pace in more than three years.

The euro bought US$1.2738 at 9pm compared to US$1.2693 late Thursday in New York, its highest point since early this month.

The US dollar fell to ¥117.57 against ¥118.37 on Thursday.

The Commerce Department estimated that the US economy expanded at a 1.6 percent annual rate between July and last month, down from 2.6 percent in the prior three months and the heady 5.6 percent recorded in the first quarter.

Economists had been expecting third-quarter growth to decelerate to 2.1 percent. It was the slowest growth in US GDP since the first quarter of 2003, when growth was 1.2 percent.

The department said the sluggish momentum reflected a housing slowdown and a higher trade deficit.

Analysts said the data reinforced market expectations that the US Federal Reserve would not raise borrowing costs again any time soon, and could in fact start cutting them next year.

"The dollar showed a knee-jerk negative reaction to the report as market players reduced expectations of a future Fed rate hike and began rebuilding expectations of a rate cut next year," said Michael Woolfolk, currency strategist at the Bank of New York.

The euro climbed to a high of US$1.2752, its highest reading since Oct. 3.

But analysts also said the prospect of another Fed rate hike had not been completely erased given ongoing inflation worries.

The GDP report's core price index, which excludes volatile food and energy prices, rose 2.3 percent in the third quarter, down from 2.7 percent in the second.

But the annual rate increased to 2.4 percent, its highest since the second quarter of last year.

"Today's GDP report was tailor-made for the dollar bears, showing faster than expected declines in both growth and core inflation," Woolfolk said.

Earlier this week, the Fed kept its benchmark rate unchanged at 5.25 percent for the third meeting in a row but toned down its rhetoric on inflation.

In particular, there was no mention that rising energy prices might keep inflation at elevated levels, in a departure from previous statements.

The next key release will be this month's non-farm payrolls report next Friday.

"A negative print for US payrolls is in the post and the next move in rates is down," said Ian Kernohan, economist at Royal London Asset Management.

The euro had been buoyed by the news that M3 money supply in the 12-nation single currency zone rose by an annual 8.5 percent, up from the 8.2 percent growth rate recorded in August and above analysts' expectations for a slowdown to 8 percent.

Following a strong German Ifo business expectations survey and consumer inflation data earlier this week, more investors now think the European Central Bank will raise its key rate further after an expected quarter-point hike to 3.50 percent in December.

The pound rose to US$1.8978, from US$1.8906 late on Thursday.

The dollar stood at 1.2454 Swiss francs, against SF1.2532.

The US currency rose against the New Taiwan dollar on the Taipei Foreign Exchange on Friday, gaining NT$0.015 to close at NT$33.280.

A total of US$815 million changed hands during the day's trading.

The US currency opened at NT$33.265 and fluctuated between NT$33.220 and NT$33.291.

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