Dlr eyes record low vs euro as credit jitters weigh

LONDON - The dollar slumped to within a whisker of its record lows versus the euro and hit a 2-month trough against the yen on Tuesday, with sentiment weighed by concerns problems in the U.S. subprime mortgage market might hurt the wider U.S. economy.

By (Reuters)

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Published: Tue 24 Jul 2007, 8:05 PM

Last updated: Sat 4 Apr 2015, 10:22 PM

Weakness in the subprime, or risky, mortgage sector is already spreading to some segments of credit markets, forcing investors to ’play safe’ over the last few weeks by buying top-rated government bonds and selling the dollar for almost all other major currencies.

Investors will be looking to U.S. June housing sales and advance second quarter gross domestic product later in the week to see if these fears have been justified.

Sterling hit a 26-year high, the New Zealand dollar hit a post-float high and the Australian dollar was also well supported.

”The dollar is still trading on the back foot. There seems to be a bit of a ’wait and see’ approach ahead of this week’s housing data. If that is soft, it will re-fuel concerns about the U.S. subprime market and could trigger a rise in risk aversion,” said Niels From, currency strategist at Dresdner Kleinwort.

Bank of England deputy governor John Gieve touched on the subprime issue, saying that the story was not over yet, pointing to vulnerabilities in the financial markets.

By 1155 GMT the dollar was flat on the day at 120.94 yen, having hit a two-month low of 120.41 yen in Asian trading.

The euro was flat against the yen at 167.25 yen, bouncing back almost a full yen from session lows in a short squeeze some traders said was behind the euro’s pop up to a session high of $1.3842, very close to the $1.3844 all-time high hit on Monday, according to Reuters data.

Sterling hit a 26-year high versus the dollar of $2.0655 earlier and was last up 0.1 percent on the day at $2.0628, lifted by the euro’s late spurt higher but with gains capped after British factory orders unexpectedly fell in July.

Euro zone data supports

The New Zealand dollar, the highest-yielding currency in the industrialized world with interest rates of 8 percent, was up 0.1 percent at $0.8060, having earlier scaled $0.81 for the first time since the currency was floated in 1985.

Euro zone rate expectations found support from euro area industrial orders data showing an above-consensus 1.7 percent rise on the month in May and 9.1 percent gain on the year.

Investors expect the ECB to raise rates to 4.25 percent by the end of the year and almost definitely to 4.5 percent by the end of the first quarter next year.

“The sector is still doing pretty well compared to long-term norms,” said Howard Archer, chief European Economist at Global Insight.

“Consequently, the ECB remains odds-on to lift interest rates by a further 25 basis points to 4.25 percent in September, despite the euro’s strength.”

The market shrugged off comments by U.S. Treasury Secretary Henry Paulson, who said on CNBC television on Monday that problems in the subprime mortgage loan sector could be contained and would not hurt the overall economy.

He also said a strong dollar was in the U.S. interest.

Later this week, investors will take their cue from the release of the Federal Reserve’s Beige Book survey of U.S. economic conditions on Wednesday.

U.S. existing home sales data for June is also due on Wednesday and new home sales data on Thursday, followed by second-quarter U.S. gross domestic product growth on Friday.

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