NEWS / Foreign Exchange

FOREX-Dollar falls to 1-yr lows as Fed approaches pause

(Adds fresh quotes, updates prices)

By Toni Vorobyova

LONDON, May 8 - The dollar hit one-year lows against the euro and sterling and a near eight-month low against the yen on Monday as U.S. rate rises were seen nearing an end, while strong data argued for tightening in Europe and Asia.

The yen was the biggest mover on the day among the majors, rallying by more than one percent against the dollar as comments from the Bank of Japan and strong data fuelled expectations that Japanese interest rates could rise soon.

In the euro zone, strong investor sentiment data for April supported forecasts for another rate hike in June. In Britain stronger than expected producer prices data cemented the view that interest rates will not be cut and may even be raised. But in the United States, weaker than expected non-farm payrolls data on Friday sparked a widespread dollar sell off. Most traders now expect that the U.S. Federal Reserve will raise rates to 5 percent on Wednesday, but will then signal a pause.

By 1130 GMT, the yen was up more than one percent against the dollar on the day, at 111.06 yen <JPY=>, around levels last seen in late September. The euro rose as high as $1.2787 <EUR=>, the Swiss franc was to 1.2181 francs per dollar <CHF=> and sterling at $1.8689 <GBP=> -- all three hitting one-year highs.

The dollar also hit a fresh one-year low against a basket of currencies <=USD> at 84.68 as Japanese investors jumped on the dollar-selling bandwagon on returning from Golden Week holidays.

"It's just confirming that the trend quite solidly is towards higher euro/dollar these days, said Teis Knuthsen, head of FX and Fixed Income Research at Danske Bank in Copenhagen.

"We are waiting for the outcome of the FOMC meeting this week and...the non-farm payrolls report on Friday was weak enough to support expectations of a pause in interest rates (at 5 percent)," he added.

DOLLAR UNDER PRESSURE

The dollar has been under pressure since the Group of Seven finance ministers last month called on China and other emerging Asian economies to allow greater currency flexibility to help redress global imbalances.

Although some G7 officials have since said investors were wrong to read the statement as a call for a weaker dollar, a G7 central bank source on Monday stressed it was up to the markets and not monetary authorities to interpret the text.

In the euro zone, data from the Sentix research group said investment sentiment about the current situation was at its highest level in five years in April. The survey is seen by some as a good barometer for the German Ifo index.

European Commission released forecasts showing that the euro zone GDP will grow a trend-like 2.1 percent this year and data also showed that German industrial orders rose strongly in February and March thanks to foreign demand.

In Japan, land prices rose in 2005 for the first time in 15 years, a further sign that deflation is ending.

Bank of Japan Governor Toshihiko Fukui said on Sunday Japan was in the process of removing excess liquidity from the short-term money market and it would take another few weeks to complete.

"(Fukui's comments are) consistent with the market's view that liquidity could be taken down to more normal levels by the end of June ... We could well see the market speculating that we could get an interest rate rise as early as the third quarter," said Ian Stannard, senior foreign exchange at BNP Paribas.

NO INTERVENTION?

The yen was further supported by expectations that Japan would not intervene directly in the currency markets and might even refrain from verbal intervention.

Fukui declined on Monday to comment on the rising yen, as did Finance Minister Sadakazu Tanigaki.

Timothy Adams, the U.S. Treasury's undersecretary for international affairs, said last week that it was appropriate Japan had not intervened to stem yen strength since March 2004 but "we should all refrain" from commenting on exchange rates.

"We haven't had too many comments as yet with regard to the strength of the yen (from Japan), so I think at the moment it's not causing too much concern," said BNP's Stannard.

Later in the week, markets will focus on the U.S. Treasury report on currencies and on whether it names China as a currency manipulator keeping the yuan artificially weak. If this happens, the dollar is likely to weaken further against most majors, led by the yen which is often traded as a proxy for the yuan.