Dollar holds near record low as rate cuts seen

By Simon Falush

LONDON (Reuters) - The dollar held near a record low versus the euro on Thursday after a sharp drop in durable goods orders and home sales fuelled recession fears and Fed Chairman Ben Bernanke signaled a readiness to cut interest rates again.

In contrast, the euro was supported by comments from ECB Governing Council member Axel Weber, who said on Wednesday that market expectations for the European Central Bank to cut rates failed to take into account the dangers of higher inflation.

The German economy is solid and the euro zone economy is only likely to slow to just below its long-term potential rate this year, Weber said. The ECB would act if long-term inflation expectations seemed to be rising significantly, he said.

"We've just had a big move driven by Bernanke who confirmed market expectations of a rate cut of 50 basis points and probably more to come," said Derek Halpenny, senior currency economist at BTM-UFJ.

This took the euro to a record high versus the dollar, breaking above the $1.50 barrier on Wednesday from below $1.48 on Monday, but investors seem to be pausing for breath having broken through a key psychological level.

"We've just had a big push and now markets are inevitably pausing and consolidating, but any pause will be fairly brief as breaking through these levels provides a catalyst to go further," Halpenny said.

The euro eased 0.2 percent to $1.5097, just off a record high of $1.5144 struck on Wednesday.

The dollar index, which tracks its performance against six major currencies, was little changed at 74.257 .DXY, just above a record low 74.070 hit on Wednesday.

The dollar was little changed against the yen at 106.40 yen after dipping below 106 yen on Wednesday.

DOLLAR WEAKNESS TO LAST

The euro has surged nearly 5 percent in roughly three weeks and investors see plenty of scope for further strength.

"In the current environment, it seems that only a clear worsening of market sentiment and a steep fall in equity markets or surprisingly weak euro zone data could stop momentum in euro/dollar," said Commerzbank in a note to clients.

The Fed has cut its benchmark overnight lending rates by 2.25 percentage points since mid-September to 3 percent, while the ECB has kept its main rate at 4 percent.

Bernanke signaled further rate cuts to avert a recession, making clear that the U.S. central bank was more worried about risks to growth than inflation. He will continue his testimony later on Thursday.

All 15 Wall Street dealers surveyed in a Reuters poll on Wednesday expected a March rate cut and saw the Fed bringing interest rates lower than previously thought.