Dollar rallies, euro falls on ECB rate cut speculation
January 06, 2009
The dollar rallied Monday and the euro slid amid expectations that the European Central bank will cut interest rates sharply this year to deal with the weakening economy.
At 2200 GMT, the European single currency dropped to 1.3632 dollars from 1.3910 dollars in New York late on Friday.
Against the Japanese unit, the dollar climbed to 93.34 yen from 91.79 yen on Friday.
Patricia Lifson at PNC Bank said the market was coming to the realization that the eurozone economies were in deep trouble and that the ECB will be forced to cut rates.
She said this has caught by surprise some traders "long" on the European currencies.
"Euro longs that had been built up over the holiday have been liquidated," she said.
"Everyone knows how bad things are in the States. The markets are now anticipating a severe deterioration of eurozone economic fundamentals, which will force the ECB's hand. The ECB is deemed to be behind the curve."
Lifson said the greenback rose on the yen on "comments by Bank of Japan officials that indicated the possibility of intervention" to keep the Japanese currency from rising too much, which could hurt exports.
"As the (Japanese) economy weakens, a strong currency for this export dependent country can only make things worse," she said.
The dollar was boosted by expectations that US president-elect Barack Obama's stimulus plans will boost the ailing American economy, dealers said.
"High expectations for Obama appear to be supporting US stocks and the dollar, although conditions surrounding the US economy are still pretty negative," said Yosuke Hosokawa, head of foreign exchange at Chuo Mitsui Trust Bank.
Traders in Tokyo were relieved that there was no major bad news related to the economic crisis during the New Year holidays, Hosokawa added.
In late New York trade, the dollar stood at 1.1086 Swiss francs after 1.0865 Friday.
The pound was at 1.4699 dollars after 1.4544.