Dollar Rally Gathers Strength (Bloomberg) (08-02-2008)

Feb. 8 (Bloomberg) -- UBS AG, BNP Paribas SA and Deutsche Bank AG had foreseen strength in the dollar and it now seems to be gaining momentum following the acknowledgement by ECB President Jean-Claude Trichet that Europe won't escape the fallout from the U.S. economic slowdown.

After Trichet stated he’s open to cutting interest rates on slowing growth, the dollar erased its loss for the year against the euro and an index measuring its performance against six of the U.S.'s biggest trading partners climbed to the highest in three weeks.

Trichet's comments and the resulting gain in the dollar suggest that the Federal Reserve's decision to lower borrowing costs twice last month put the U.S. economy on course to recover faster than Europe, said traders who have called for a rally in the greenback since the fourth quarter.

The dollar has gained 2.3 percent this week to trade at $1.4482 per euro as of 9 a.m. in London and touched $1.4440 yesterday, the strongest since Jan. 22.

The U.S. currency sank to an all-time low of $1.4967 per euro on Nov. 23. It last strengthened on an annual basis against the common European currency in 2005, and weakened 10.6 percent last year and 11.4 percent in 2006.

With the global economy slowing, investors are focused on relative growth prospects rather than which country has the interest-rate advantage, said Yu, who predicted last week the dollar would strengthen to $1.35 per euro by year-end.

On that basis, the U.S. may have an edge as the steepest rate cuts by the Fed in seven years supports the economy as Europe slows, strategists at Paris-based BNP said this week. U.S. policy makers have lowered the target rate for overnight bank loans by a combined 2.25 percentage points since Sept. 18 to 3 percent. The ECB has kept its main refinancing rate unchanged at 4 percent since June.

A U.S. recession is now an even bet, a Bloomberg News survey shows. The economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled Jan. 30 to Feb. 7. A separate poll for the euro-zone shows growth slowing to 1.70 percent.

BNP, the most accurate of 31 firms surveyed by Bloomberg about their currency predictions for the second half of 2007, says the dollar will strengthen to $1.37 by year-end. The bank expects the ECB to reduce rates by 1 percentage point this year.

Deutsche Bank, the world's largest currency trader, predicts an 8 percent gain in the dollar this year as the euro- zone economy expands 1.6 percent, lagging behind the 1.9 percent growth it projects for the U.S. For 2009, Frankfurt-based Deutsche Bank puts growth at 2.6 percent in the U.S. and 1.9 percent in Europe.

Source: Bloomberg