FOREX-Euro skids to 2013 low, dollar index soars to 6-month high

Fri Mar 1, 2013 1:16pm EST

Related Topics

* Dollar rallies as data contrasts with euro zone

* Some speculation of ECB rate cut pushes euro lower

* Rate differentials move in favor of United States

* Washington faces $85 billion in spending cuts

By Julie Haviv

NEW YORK, March 1 (Reuters) - The euro fell to its lowest level of the year against the dollar on Friday while the dollar rose to a six-month high against a basket of currencies as weak euro zone and Asian data contrasted with more healthy U.S. economic gauges.

Speculation that the European Central Bank may take action to curb economic deterioration gathered pace, with the euro dropping below $1.30 for the first time since December as data showed weakness in the European manufacturing sector while growth in Asia cooled.

Poor euro zone data, along with cooling inflation and the risk that political instability in Italy may push up borrowing costs for struggling countries, could exert pressure on the ECB to lower interest rates in coming months.

But, while economic data from Europe and China was disappointing, there are clear signs of economic recovery in the United States.

The pace of growth in U.S. manufacturing rose to its fastest rate in over a year and a half in February while U.S. consumer sentiment rose in February as Americans were more hopeful that the jobs market will improve.

The dollar's status as a safe haven also worked in its favor against the backdrop of sweeping U.S. spending cuts enacted on Friday.

"We are living in an unusual world for foreign exchange, where stronger data keeps talk of the end of quantitative easing in 2013 alive, and helps the dollar, while any future weaker data will lead to concerns on global growth that are helpful for the dollar," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.

"It is this asymmetry that over time obviously adds up to create a positive dollar bias," he said.

The dollar index reached its highest level since late August. It gained as the euro fell to a 2013 trough of $1.2965, its lowest since Dec. 11. It last traded at $1.3014 , down 0.3 percent on the day.

The euro fell for a fourth straight week and at current prices has lost about 1.5 percent of its value against the dollar this week.

The U.S. government hurtled toward making deep spending cuts that threaten to hinder the nation's economic recovery, after Republicans and Democrats failed to agree on an alternative deficit-reduction plan.

President Barack Obama heaped blame on Republicans for the failure to break a stalemate to avert the automatic spending cuts and warned that a "ripple effect" would start hurting the middle class and the overall U.S. economy.

The International Monetary Fund warns that the cutbacks could knock at least 0.5 percentage point off U.S. economic growth this year and slow the global economy.

Interest rate spreads between two-year U.S. government bonds over their German counterparts gave investors another reason to buy the dollar. Some expect the Federal Reserve to slow its asset purchase program, called quantitative easing, later in the year as the U.S. labor market shows signs of improvement.

In contrast, joblessness in the euro zone rose to an all-time high while business surveys showed manufacturing activity was sluggish in February.

DOLLAR REIGNS

"When you look across Europe, you see high unemployment, barely any growth, apart from Germany, and rising debt levels," said Howard Jones, advisor at money mangers RMG Wealth Management. "What Europe needs is growth, easier monetary conditions and a weaker currency."

"The U.S. data in comparison is much better than Europe and to us, the dollar is a buy. We expect the euro to ease towards the mid-$1.20s in the next two months."

The dollar rose to a 2-1/2-year high against sterling after a shock contraction in manufacturing in February raised expectations that the Bank of England could announce fresh monetary easing as early as next week.

Against the yen, the dollar last traded at 93.54 yen, up 1.1 percent on the day, according to Reuters data.

Expectation of aggressive monetary policy action from the Bank of Japan has caused the dollar to notch impressive gains against the yen since late last year.

The dollar has risen nearly 7.9 percent against the yen so far in 2013, making it one of the strongest performing currency pairs of the year.

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