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FOREX-Dollar sinks to 3-year lows as US rate view weighs

Published 05/04/2011, 02:34 PM
Updated 05/05/2011, 04:04 PM

* Weak U.S. jobs, services data add to dollar's woes

* Euro hits 17-month high but fades ahead of ECB meeting

* Dollar at 6-week low vs yen; high-yield FX struggles

* One-month euro/dollar implied vols rise again (Updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 4 (Reuters) - The dollar slumped to a three-year low on Wednesday and the currency's outlook darkened further as softer-than-expected employment and services sector data affirmed expectations U.S. interest rates would remain low this year.

The greenback also fell to a record against the Swiss franc and at one point dropped below 80.50 against the yen, the dollar's weakest level since major central banks intervened to weaken the Japanese currency on March 18.

"U.S. data have not been strong enough for the Fed to resume raising interest rates," said Geoffrey Yu, senior currency strategist at UBS in Stamford, Connecticut. For details, see [ID:nN04209762]

"The Fed has raised the bar for a policy tightening and it's going to remain the case for some time ahead. It's just a question of 'When will the Fed really signal a change in direction?' Right now, that doesn't seem to be the case."

In early afternoon trading, the ICE Futures' dollar index dropped to 72.696, its weakest since late July 2008. The index has fallen in 11 of the last 12 sessions and lost 7.7 percent in 2011 <.DXY>.

The euro, on the other hand, remained fairly well supported in anticipation of higher euro zone interest rates and strong sovereign demand.

The European Central Bank is scheduled to convene on Thursday for its monetary policy meeting. It raised rates in April for the first time since 2008, but may hold them steady at Thursday's meeting.

Markets, however, have fully priced an interest rate hike by the ECB in July as it attempts to rein in inflation and have started factoring in some probability of an earlier rate increase in June.

Investors also shrugged off news Portugal had become the third euro zone country in the last year to need a bailout.

The single currency rose as high as $1.49404 on electronic trading platform EBS, the highest since December 2009. It was last at $1.4864, up 0.3 percent. Traders said there are options barriers at $1.4950 and $1.5000.

They said a move above $1.50 was likely but would probably have to wait until after the ECB meeting.

Implied volatility in one-month euro/dollar options continued ascending, rising to 11.20 percent on Wednesday from 10.90 percent on Tuesday, reflecting uncertainty as to the timing of next ECB rate increase.

Investors were also nervous ECB President Jean-Claude Trichet may disappoint investors and make less-hawkish comments than in his previous statements.

Against the Swiss franc, the dollar fell to 0.8554 franc and last changed hands at 0.8592, down 0.2 percent.

Against the yen , the dollar fell as low as 80.44, a six-week low.

If it falls further, analysts said it could put markets on alert for official intervention to slow the pace of yen gains.

Major central banks actively sold the yen earlier this year after it hit a record high against the dollar. A strong yen could hurt Japan's export-led economy as it struggles with slow growth and the aftermath of March's earthquake and tsunami.

"People are watching that 80 level, which isn't very far away," said BNY Mellon strategist Michael Woolfolk.

The slide in commodities, however, provided support for the U.S. dollar against commodity-linked currencies such as the Australian and Canadian dollars.

The Australian dollar moved further away from a nearly three-decade high of US$1.1012 and was last at US$1.0774, down 0.6 percent .

The Canadian dollar also fell, pushing the greenback 0.5 percent higher at C$0.9573 . (Additional reporting by Steven C. Johnson; Editing by Dan Grebler)

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