April 25, 2008 / 1:43 PM / 12 years ago

FOREX-Dollar heads for best month in 2-1/2 years

(Recasts, adds comments, changes byline and dateline, previously LONDON)

By Vivianne Rodrigues

NEW YORK, April 25 (Reuters) - The dollar headed for its best monthly performance in 2-1/2 years against a basket of major currencies on Friday, boosted by a growing view the Federal Reserve may stop cutting interest rates.

Having been pessimistic on the U.S. economic outlook for some time, investors are now embracing upside data surprises, analysts say.

The perceived odds of the Fed keeping its benchmark interest rate unchanged at 2.25 percent at its meeting next week is now about 26 percent, futures trading shows FEDWATCH. Just over a week ago, futures were evenly split between a 25 and a 50 basis point cut.

Meanwhile, traders are paring bets the next move by the European Central Bank would be a hike in benchmark interest rates.

“Rate expectations are really shifting,” said Mark Meadows, a market analyst at Tempus Consulting in Washington. “While most people now believe the Fed is about to end its easing cycle, a growing number of investors believe the ECB may have to start cutting rates really soon. And the dollar is the main beneficiary of that reversal.”

The dollar index, which tracks its performance against a basket of major currencies, hit a one-month high of 73.030 .DXY, putting it on track for its best monthly performance since November 2005.

The euro fell as low as $1.5555, its weakest since April 3 EUR=, a drop of around 0.5 percent on the day and on track for its biggest monthly decline in nearly a year.

Gains in the dollar this week were also supported by economic data showing signs of resilience in some areas, including employment. On Thursday, a government report showed the number of U.S. workers filing initial claims for jobless benefits unexpectedly fell last week.

Investors will look for further clues on the health of the U.S. economy and the outlook for Fed rate cuts from the Reuters/University of Michigan consumer sentiment survey released at 9:55 a.m. (1355 GMT).

In contrast to slightly stronger U.S. data, the Ifo German business sentiment index this week showed the biggest monthly fall since September 2001 on Thursday, taking the April headline number to a two-year low.

Together with a soft euro zone manufacturing survey, the data knocked the euro off record highs above $1.60 set at the start of the week.

“Europe is really not insulated and its economy is beginning to show signs of a slowdown,” said Meadows. “The truth is that there was not much of a demand to sustain the euro at $1.60.”

The dollar also rallied earlier to a two-month high of 104.81 yen JPY=, with the Japanese currency failing to benefit from news that Japanese core consumer prices rose at their fastest pace in a decade in March [JPCPI=ECI].

Japanese government bond futures had their biggest one-day loss in five years, however, with markets starting to price in a higher chance of a BOJ rate rise before the end of the year. (Editing by Andrea Ricci)

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