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Dollar edges up from 20-mth low vs euro before ECB

Written by: Staff
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TOKYO, Dec 5 (Reuters) The dollar inched up against the euro on Tuesday but stayed near 20-month lows as traders took stock ahead of a spate of interest rate decisions this week that will highlight the U.S. currency's narrowing yield advantage.

The dollar has plumbed the troughs against the euro, 14-year lows versus sterling and four-month lows against the yen on soft U.S. data that suggests to many in the market the Federal Reserve will have to trim rates next year as the economy slows.

The euro has garnered additional support from expectations the European Central Bank will bump up rates by 25 basis points to 3.5 percent on Thursday, and some economists predict another hike in early 2007.

But the speed of the dollar's fall, in which the currency lost around 3 percent in value against the euro in less than two weeks, has raised concerns that the sell-off may have been overdone. That has prompted traders to tread cautiously.

''The market still needs to confirm if the dollar weakness is going to continue,'' said the chief forex trader at a European investment bank in Tokyo.

''More people are expecting the interest rate difference to narrow,'' he added.

By 0255 GMT, the euro had slipped to .3325 from around .3345 in late U.S. trade. It struck a 20-month high of .3370 on Monday.

Sterling fell to .9775 from around .9815, off a 14-year peak of .9849 scaled on Friday.

Against the low-yielding Japanese currency, the dollar edged up to 115.35 yen still in sight of the four-month low of 114.97 yen hit at the end of last week.

The euro inched down to 153.70 yen It struck another record high of 154.18 yen in the previous session on electronic trading platform EBS.

DEPENDS ON ECB, JOBS After the run on the dollar due to soft U.S. data including factory activity and housing, traders were wary of pushing the currency to new lows until they scrutinise the monthly jobs report on Friday for clues about where the U.S. economy and rates are headed.

On Monday, a report showed pending U.S. home sales fell 1.7 percent in October, though the index was above the low hit in July.

The Fed is widely expected to keep the overnight yield on hold at in Dec. 12 policy meeting, but with each dose of downbeat data the market is coming round to the idea the central bank will cut rates next year.

''The ECB rate decision and the jobs data are going to be very important,'' said Tohru Sasaki, chief forex strategist at JPMorgan Chase in Tokyo.

Sasaki said the dollar's sudden fall against European currencies had been ''rather strange'', and with the market pricing in prospects for narrowing rate gaps, the softness could be temporary.

''I'm a little cautious about the dollar extending its weakness. It might rebound sooner rather than later,'' he said.

With a euro zone rate rise seen as all but certain this week, investors are eager to tune in to what ECB President Jean-Claude Trichet says in his post-meeting news conference about the prospects for more increases next year.

In addition to the ECB, looming large on the market's radar are rate decisions this week from the central banks of Canada, Australia and New Zealand, as well as the Bank of England.

A Reuters poll of 50 economists predicted the BoE will stay on hold at 5 percent on Thursday, just below the 5.25 percent targeted by the Fed since late June, but puts the chance of the BoE hiking rates in early 2007 at 40 percent.

REUTERS CS DS1157

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