Dollar falls on durables data, Trichet rate comments

By Lucia Mutikani

NEW YORK (Reuters) - The dollar fell for a second straight session on Wednesday, weighed down by surprisingly weak U.S. durable goods orders and remarks by European Central Bank chief Jean-Claude Trichet that euro zone rates were at the right level.

Analysts said Trichet's comments, in an interview with a French magazine, with news that German and French business confidence unexpectedly improved in March, dampened expectations of a swift ECB interest rate cut.

That left investors focusing on the widening interest rate differential between the United States and the euro zone. They drove the euro to a session high of $1.5845, within spitting distance of an all-time peak of $1.5905 touched last week.

"The durable goods orders point to further weakness from the investment side of the economy, which is not good news," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

"The ECB comments reiterating the appropriate level of interest rates also underline the fact that the interest rate differential between the U.S. and Europe will continue to widen. We see the Fed cutting rates over the next few months."

The Federal Reserve has slashed its benchmark overnight lending rate by 3 percentage points to 2.25 percent since mid-September, while the ECB has kept its refinancing rate at 4 percent. Lower interest rates make dollar-denominated assets less appealing.

SCRAMBLE TO RE-ESTABLISH DOLLAR SHORTS

In late New York trade, the euro was up 1.3 percent at $1.5836. Analysts said the single currency's decisive rebound indicated that the dollar's recovery last week was mainly driven by month-end and quarter-end squaring of books.

"It's a combination of the market scrambling to re-establish short dollar positions, encouraged by the divergent economic data and probably bargain-hunting from the Middle East central banks," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.

"The Federal Reserve may have provided liquidity to the market, but that has not changed the business cycle itself."

Analysts said while the euro would probably not retest last week's historic highs against the dollar during New York's Wednesday session, the market was positioning for new highs over the next week or so.

The dollar managed to trim its losses against the yen after a slightly better-than-expected U.S. new home sales report for February, although the data did little to ease concerns about the beleaguered sector and the overall economy.

Interest rate futures are pricing in a roughly 46 percent chance of a 50 basis points cut in the fed funds rate target next month, to 1.75 percent.

The dollar dropped to a session low of 98.900 yen before regaining some ground to trade around 99.140 yen, down 0.9 percent on the day. Against the Swiss franc, the dollar tumbled 1.6 percent to 0.9903 francs.

The dollar's losses against the yen and the Swiss franc were attributed to declining U.S. stocks. The dollar had some edge versus the Canadian and New Zealand dollars.