Dollar plummets as ECB dashes rate-cut hopes

A passer-by is silhouetted in front of a display showing movements of the current Nikkei share average outside a brokerage in Tokyo March 3, 2008.

NEW YORK (Reuters) - The U.S. dollar tumbled to record lows against the euro and the Swiss franc on Thursday after the European Central Bank downplayed prospects of an interest rate cut and did not voice concerns about the rally in the euro.

News that U.S. home foreclosures rose to record highs in the fourth quarter also added to bearish investor sentiment towards the greenback, helping to push the dollar to historic troughs versus a basket of currencies and the Swiss franc.

Analysts said there had been some anticipation that ECB President Jean-Claude Trichet would comment on the euro after remarks this week by euro zone finance ministers group chairman Jean-Claude Juncker that the common currency was overvalued.

"The fact that he did not particularly mention the euro sent a signal that at least for the moment the ECB does not seem to be as concerned about the currency as some of the other European officials," said Paresh Upadhyaya, portfolio manager at Putnam Investment Management in Boston.

"The market interpreted the lack of a statement on the currency as a green light for further euro strength."

The euro jumped to $1.5380, its highest level since its launch in 1999, according to Reuters data. It was last trading at $1.5377, up 0.7 percent on the day.

The New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of six currencies, tumbled to a lifetime low of 72.963 .DXY, according to Reuters data. It last traded at 72.951.

Investors were unmoved by the International Monetary Fund's assessment that the euro was now on the strong side in relation to its medium-term fundamentals.

The ECB left its benchmark interest rate at 4.0 percent but raised inflation forecasts for this year and 2009. ECB staff also cut their prediction of GDP growth in the euro zone.

HAWKISH TONE

"The overall tone of Trichet's press conference was undeniably hawkish. Any expectation that the ECB will be cutting sooner rather than later has been pushed back in the calendar. We are looking at the third quarter at the earliest," said Upadhyaya.

With the Federal Reserve expected to cut its benchmark overnight lending rate by at least 50 basis points later this month as it fights to stave off an economic recession in the United States, market attention was focused on the yield play.

The fed funds rate target has been lowered by 2.25 percentage points to 3.0 percent since mid-September, erasing the dollar's yield advantage against the euro.

Sentiment towards the dollar was further darkened by data showing that U.S. home closures surged to record highs in the fourth quarter.

That came on the heels of news that mortgage lender Thornburg Mortgage Inc TMA.N had suffered some material defaults, putting pressure on U.S. stocks and sending the dollar tumbling against yield currencies such as the yen and Swiss franc.

The dollar declined 1.4 percent to a session low of 102.57 yen and it dropped to a record low against the Swiss franc at 1.0227.

"The truth is that nobody wants to support the dollar right now because we all know that Bernanke will cut interest rates no matter what's going on with inflation. People just want to sell U.S. assets," said Andrew Busch, a global foreign exchange strategist at BMO in Chicago.

Central banks in Britain and New Zealand also left policy on hold on Thursday.

Sterling hit the year's high against the dollar in a relief rally as markets had priced in a small chance of a British cut from the current 5.25 percent. It eased from an earlier record low versus the euro.

The kiwi was supported after the Reserve Bank of New Zealand said inflationary pressures remained persistent. The benchmark rate there is 8.25 percent.

(Additional Reporting by Lucia Mutikani)