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FOREX-Euro plunges to 2013 low as dollar index hits 6-month high
March 1, 2013 / 2:41 PM / in 5 years

FOREX-Euro plunges to 2013 low as dollar index hits 6-month high

* Dollar rallies; euro, sterling hurt by poor data

* Some speculation of ECB rate cut pushes euro lower

* Rate differentials move in favor of United States

* Washington close to taking first steps on $85 billion in cuts

By Julie Haviv

NEW YORK, March 1 (Reuters) - The euro tumbled to a 2013 low against the U.S. dollar on Friday while the dollar rose to a six-month high against a basket of currencies as weak euro zone data highlighted a growing economic disparity with the United States.

Speculation that the European Central Bank may take action to curb economic deterioration gathered pace after benign euro zone inflation data, with the euro falling below the key psychological level of $1.30 for the first time since December.

Investors shunned the euro as European manufacturing appeared no closer to a recovery last month while growth in Asia cooled, according to business surveys and trade data that pointed to ongoing weakness in global demand.

Poor euro zone economic 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, which should keep the euro weak.

“The dollar index is flying high on improving growth differential prospects ... while at the same time investors remain concerned that fiscal uncertainty has the potential to weigh on the economy,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

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 meets top leaders of Congress at the White House at 10 a.m. (1500 GMT) to explore ways to avoid the unprecedented, across-the-board cuts totalling $85 billion.

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.

The dollar index reached its highest level since late August. It gained as the euro fell to a 2013 trough of $1.2985, its lowest since Dec. 11. Option barriers were cited at $1.2950 and $1.2900.

“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.”

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 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

Despite the spending cuts hurting growth in the United States, the economy is not expected to perform as badly as the euro zone, Britain and Japan, which are all battling recession or deflation, giving the dollar a boost.

Investors will focus on the Institute for Supply Management’s February manufacturing index and after a robust rise in factory activity in the Midwest, analysts said there was a chance of a good reading.

“The end of 2012 has likely seen the low in real U.S. yields. This suggests the Fed is unlikely to do further easing measures,” Deutsche Bank said in a note.

It added that even if the Fed did ease more, other central banks like the Bank of Japan were catching up with Fed easing, pushing down the value of their currencies against the dollar.

The dollar rose to a 2-1/2-year high against sterling after a shock contraction in manufacturing activity 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 92.78 yen, up 0.3 percent on the day, according to Reuters data.

Expectations 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 percent against the yen so far in 2013, making it one of the strongest performing currency pairs of the year.

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