Dollar falls on concerns over financial sector
NEW YORK (Reuters) - The dollar eased on Monday amid concern losses at financial companies will continue to mount and further weigh on the slowing economy, limiting the Federal Reserve's ability to raise interest rates by year-end.
Demand for the greenback fell as Merrill Lynch MER.N said Lehman Brothers Holdings Inc LEH.N may post a loss in the third quarter and take an additional $2.5 billion write-down on home loans for the period. The report, which came after news that regulators seized two small U.S. banks on Friday, helped drag Wall Street stock indexes down.
Negative sentiment was compounded by comments from Minneapolis Fed President Gary Stern, who was reported by the Financial Times newspaper as saying that the next two to three quarters could be disappointing.
"Stern's comments indicate the deterioration in the credit crunch with more certainty than they do regarding increased inflation. The remarks are rather dovish," said Ashraf Laidi, chief FX strategist at CMC Markets in New York.
"The Fed remains not only handicapped in raising interest rates but at risk of prolonging the credit slump and prompting a contraction of economic growth."
In late afternoon trading, The New York Board of Trade's dollar index, which tracks the greenback's performance against a basket of six major currencies, hovered around 72.668, down 0.2 percent, after having dropped as low as 72.609.DXY.
Declines in U.S. stocks helped pull the dollar down from a one-month high scaled earlier against the Japanese yen at 108.08 yen. The dollar was last trading 0.4 percent lower at 107.46.
The euro shrugged off a report showing German consumer sentiment hit a five-year low and rose as high as $1.5768. Still, analysts said the market lacked enthusiasm to push the currency above $1.60. The euro traded 0.2 percent higher at $1.5747.
SYSTEMIC RISK
"Despite very negative data over the last several days, the euro has surprisingly held its ground. The primary reason for that is the market is very much worried about systemic risk in the U.S. financial system," said Boris Schlossberg, senior currency strategist at DailyFX.com.
"I don't think the euro has any real chance of exceeding $1.60, unless we get significantly worse news from the U.S., some major bankruptcy or systemic failure that happens," he added.
Analysts said signs that the fallout from the U.S. credit crisis was spreading to Europe, Australia and New Zealand meant traders were not keen to buy the euro and other high-yielding currencies aggressively.
"Overall, the euro bulls are a bit reluctant to engage in a strong rally after the recent spate of weak economic data," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Canada.
British house prices fell for a tenth straight month in July, their biggest annual fall since the survey by property consultants Hometrack began in 2001, a report showed on Monday.
That caused the euro to rise to a session high of 0.7933 against sterling before retreating to last trade at 0.7895, little changed on the day.
Unexpectedly strong New Zealand trade data lifted the kiwi 0.5 percent to $0.7446. But it stayed near the six-month trough of $0.7387 it traded at last Thursday.
Market focus this week will shift to a deluge of data, particularly second-quarter U.S. GDP on Thursday and Friday's U.S. jobs figures.
(Additional reporting by Lucia Mutikani in New York; Editing by Dan Grebler)
