Dollar rallies vs euro, bailout vote awaited
NEW YORK (Reuters) - The U.S. dollar rose against the euro on Wednesday on the view the European Central Bank might have to cut interest rates as doubts mount over the euro zone's ability to deal with the global financial crisis.
Optimism that U.S. lawmakers would eventually approve a $700 billion plan to stabilize the domestic financial system also supported the dollar, lifting it against major currencies.
The plan was rejected by U.S. lawmakers on Monday, but the Senate is expected to vote on a revised version on Wednesday night that will allow the U.S. Treasury to buy bad loans from banks to encourage fresh lending and boost economic growth.
If the bailout package passes the Senate, as expected, it will put more pressure on the House of Representatives to follow suit when it meets on Thursday.
"The concern in the currency market right now is that if the financial crisis panic spreads to Europe, there is no institutional way to create the kind of rescue package the U.S. Treasury has come up with," said Boris Schlossberg, director of foreign exchange research at GFT Forex in New York.
"There is concern among market participants that the ECB may have to resort to an emergency rate cut tomorrow as the only type of policy response to everything that has been going on. This is really pressuring the euro."
European governments scrambled this week to shore up banks through nationalizations and capital infusions as the financial contagion from the U.S. subprime mortgage mess spread across the Atlantic. The ECB meets on Thursday to decide on interest rates and could still leave its benchmark rate steady at 4.25 percent.
EURO HITS TWO-WEEK LOW VS DOLLAR
The euro dropped beneath the key $1.4000 level at one point, trading as low as $1.3977, the lowest in about two weeks. Schlossberg attributed the move to Russians selling "a couple of billion euros," with speculators running stops around the $1.4000 level.
In late New York trade, the euro was down 0.6 percent at $1.4010. Those losses lifted the ICE Futures U.S. dollar index, which measures the value of the dollar against a basket of currencies, 0.5 percent higher to 79.693 .DXY.
The euro was also hurt by data showing euro zone manufacturing fell to a near seven-year low in September, while the unemployment rate rose to 7.5 percent in August from 7.4 percent the previous month.
"While the U.S. is on a systemic approach, Europe is kind of messy. Europe is putting one fire out at a time," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.
The dollar fell to a session low of 105.34 yen after data showed that U.S. factory activity shrank in September to its lowest since the 2001 recession.
It later recovered to trade down 0.1 percent at 105.87 yen, as attention reverted back to optimism that lawmakers would vote in favor of the bailout bill.
"It is obvious that the credit market is affecting the real economy and this data confirms that," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
"So markets are hopeful more than ever that the bailout package would pass and we see investors buying back the dollar."
The dollar also got a boost from a report showing U.S. private employers cut a surprisingly low 8,000 jobs in September, according to ADP Employer Services.
News that Britain's manufacturing sector shrank at a record pace in September pressured sterling, driving it down 0.7 percent to $1.7705. The report raised the chances of a Bank of England rate cut next week.
Funding pressures remained extremely tight in the money market, especially for funds covering the year-end.
(Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss)
