September 4, 2008 / 7:53 PM / 11 years ago

FOREX-Dollar rallies vs euro, trades at year's high

* Dollar rallies to its highest vs euro this year

* ECB downgrades growth view, stoking rate-cut speculation

* Euro zone’s Juncker: Euro still effectively overvalued (Adds comments, updates prices, changes byline)

By Vivianne Rodrigues

NEW YORK, Sept 4 (Reuters) - The U.S. dollar rallied on Thursday to its highest against the euro this year after the European Central Bank cut its growth outlook for the 15-nation region, boosting the likelihood of interest rate cuts.

The euro deepened losses after the chairman of euro zone finance ministers, Jean-Claude Juncker, said the zone’s single currency was still effectively overvalued despite its recent fall. For details see [ID:nL4400641] and [ID:nBRM000070].

Euro zone economic uncertainty was “particularly high,” ECB president Jean-Claude Trichet said after the bank left its benchmark lending rate at 4.25 percent on Thursday. But he cautioned inflation remains high and risks are to the upside. [ID:nL4102376].

“Trichet maintained his unambiguously hawkish language on inflation, but markets are largely focusing on the ECB’s growth downgrades for the euro zone,” said Ashraf Laidi, chief FX strategist at CMC Markets U.S. in New York. “This bolsters the possibility of an eventual ECB easing in the second half of 2009.”

The ECB staff now forecasts growth in the euro zone for 2008 at between 1.1 and 1.7 percent. For 2009 it forecasts growth between 0.6 percent and 1.8 percent.

Three months ago, the forecast was for growth of about 1.8 percent this year and 1.5 percent in 2009. [ID:nL4276616].

In late afternoon trading in New York, the euro EUR= tumbled more than 1 percent on the day to trade at $1.4332, after falling as low as $1.4321, its lowest since December 2007, according to Reuters data.

The euro also fell against the yen to its lowest since March and last traded at 153.63 yen EURJPY=, down 2.1 percent on the day.

The ICE Futures U.S. Dollar index .DXY, which tracks the value of the greenback against a basket of six major currencies, rose 0.7 percent to 78.624.

Adding to dollar gains versus the euro were comments by the International Monetary Fund that the euro was on the strong side despite some weakening and the greenback was now closer to its medium-term equilibrium level. [ID:nN04286302].

The dollar, however, fell 1.1 percent against the yen to trade at 107.12 JPY=, hurt by sharp losses on Wall Street .DJI.

“The focus remains on risk and risk-aversion levels remain high,” said Ron Simpson, director of FX currency research at Action Economics in Tampa, Florida. “U.S. asset prices are on the decline and dollar/yen is reacting to the risk backdrop.”

U.S. PAYROLLS AHEAD

On the U.S. economic front, the dollar had limited reaction to reports showing private-sector job contraction of 33,000 last month, roughly in line with forecasts, while the number of people filing for jobless benefits rose by 15,000 in the latest week. [ID:nN03319921] [ID:nN03319921].

A separate report showed the U.S. service sector expanded slightly more than expected in August. [ID:nN04520521].

Investors will have a better idea of how the U.S. labor market is weathering the economic slowdown on Friday when the Labor Department releases its August nonfarm payrolls report.

“The renewed decline in August ADP suggests deterioration in August payrolls following the smaller-than-expected loss of 76,000 private jobs in July,” Laidi said.

Sterling GBP= fell 0.7 percent to $1.7693, surrendering early gains following the Bank of England's decision to leave interest rates unchanged at 5.0 percent. The euro was last down 0.7 percent at 81.07 pence EURGBP=. (Additional reporting by Wanfeng Zhou and Nick Olivari; Editing by James Dalgleish)

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