The U.S. dollar traded lower versus the euro and the yen in afternoon trade in Asia on Tuesday on the view that the Federal Reserve will likely delay any planned rate hike to keep the world's biggest economy from slipping into a recession.
Though Fed Chairman Ben Bernanke this month has said the outlook for the U.S. economy has improved, the country is still saddled with a rising number of jobless people, falling home prices, growing defaults on mortgages, a slumping financial sector and declining manufacturing output.
"The financial markets are placing too much bet on the possibility that the Fed will be tightening its monetary policy soon, even as early as in August. But so far, the economic picture looks clouded and the U.S. has yet to clean up its housing sector which continues to represent a threat to the economy," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
The Fed will likely raise its key interest rates by the fourth quarter of 2008 or even later, Cohen said.
Delays in the rate increase will continue to pressure the dollar.
At 1 p.m. (0500 GMT), the euro was trading at $1.5526, up from $1.5470 in Sydney this morning. The dollar was buying 107.86 yen, down from 108.18 yen.
Since it began easing monetary policy in September, the Fed has cut its key rates seven times by a cumulative 325 basis points. The series of rate cuts caused the U.S. currency to fall to record lows against the euro and to multi-year lows versus the Japanese yen.
Also putting a strain on the dollar are increasing bets the European Central Bank (ECB) will raise its benchmark rate by at least a quarter of a percentage point in July, its first rate hike in a year.
ECB President Jean-Claude Trichet this month did not rule out the possibility of a rate increase in the 15-member euro zone as early as July to curb inflation.
Consumer prices in the euro area rose 3.7 percent in May from a year ago, its fastest pace in 16 years, data released on Monday showed. That was faster than the 3.3 percent gain in April and way above the ECB's 2 percent target for the year.
"It's almost certain that the ECB will raise interest rates next month," said Cohen.
"Trichet has certainly implied that they would."
And next month's rate hike in the euro zone may not be the last for the year, Cohen said.
"While Trichet has indicated that it will be a one-time rate hike, it could potentially be the first in a series."
The ECB has kept its key rate unchanged at 4 percent, a six-year high, since June 2007.
Media reports implying that the Fed is not likely to increase rates soon also weighed on the dollar.
John Noonan, a senior foreign exchange analyst at Thomson IFR Markets, said central bank expectations are continuing to dominate trading though hawkish expectations relating to the Fed seen last week are being scaled back due to weak data.
Overnight, an unexpected steep contraction in New York Empire State manufacturing data combined with anti-inflation talk from the ECB to push the dollar down.
The New York Federal Reserve Bank's Empire State Manufacturing Index fell 5 points to minus 8.68 in June, the fourth negative reading in the last five months. Economists polled by Thomson IFR Markets had a median forecast of a reading of minus 0.5 for this month.
ECB Governing Council member Nout Wellink said stabilizing inflation in the medium term was a priority.
David Mann, currency strategist at Standard Chartered Bank, predicts the dollar may weaken to $1.56 against the euro in the third quarter and further to $1.58 in the fourth should the ECB raise its rates next month.
Later today, investors will be waiting for the release of last month's U.S. housing data and producer price index which they hope would give them more clues on where the Fed's interest rates are headed.
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