Dollar lower against euro

Published December 31, 2006

NEW YORK, Dec 30: The US dollar finished the year on a low note against the euro on Friday in the final trading day of 2006 trading as market participants bid up the European currency on the back of fresh data.

The euro was trading at $1.3197 at 2200 GMT, up from $1.3149 late on Thursday in New York.

The dollar meanwhile edged up a shade to 118.96 yen from 118.90 yen late on Thursday -- virtually unchanged from the end of 2005.

The euro has soared over 11 per cent against the dollar in the past 12 months as the world's largest economy has cooled, largely amid a housing market downturn.

Concerns about the US trade gap with its major trading partners have also propelled the dollar lower.

Traders said the euro benefited Friday from data that showed the eurozone money supply, as measured by the broad M3 indicator, expanded 9.3 per cent in November after an 8.5 per cent gain in October.The data appeared to support the stance of the European Central Bank that eurozone interest rates need to rise further, analysts said.

During the course of 2006, the euro has gained 11.4 per cent against the dollar, 12 per cent against the yen and 2.7 per cent against the Swiss franc.

Analysts believe the principal driver of the foreign exchange market this year has been differences in interest rates across economic zones.

Interest rates in the US have been held steady since August at 5.25 per cent, giving momentum to the European currency in recent months, while recent data in Japan has dampened expectations of another rate hike there.

Referring to euro's gains Friday, Calyon analyst Stuart Bennett said the European Central Bank may take some comfort from the details of the money supply data.

The data showed that credit growth to residents and the private sector both slowed, but Bennett said that this would be insufficient to prevent further interest rate rises in 2007.

The interest rate hikes are having some impact on the money supply data, but not a sufficiently strong enough one to stop the ECB from continuing to hike, Bennett said.

This should imply at least two more 25 basis point rate hikes in the first half of 2007, taking the refi rate to 4.0 per cent from 3.5 per cent currently and providing support for the euro during the first half of 2007,” he said.

The dollar had been supported by better-than-expected US data in early trading Friday, including existing home sales that rose 0.6 per cent in November. — AFP

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