February 8, 2008 / 9:45 PM / 11 years ago

FOREX-Dollar set for biggest weekly rise since June 2006

(Updates prices, adds byline)

By Kevin Plumberg

NEW YORK, Feb 8 (Reuters) - The dollar slipped on Friday on light profit-taking but was still on track for the biggest weekly rise since June 2006 as investors increasingly expect the U.S. growth slowdown to drag on other economies.

The euro was off 3 cents in the week against the dollar and was seen weakening more in coming days on growing expectations the European Central Bank will cut interest rates later this year, even with persistent inflation pressures.

“Despite a torrent of bad economic news the dollar has been on a tear this week, as the currency market recognized the fact that the slowdown in U.S. economic activity is likely to drag down growth in the rest of the G10 universe, forcing other central banks to adopt a much more accommodative monetary policy,” said Boris Schlossberg, chief currency strategist with DailyFX.com in New York.

The euro edged up 0.2 percent on the day to $1.4505 EUR=, but was down 2 percent on the week, the largest weekly decline in one and a half years.

The dollar was down 0.2 percent at 107.32 yen JPY=.

For the week, the New York Board of Trade’s U.S. dollar index was up 1.6 percent to 76.652 .DXY.

The euro had jumped to a session high after a report said that OPEC may adopt the euro and abandon the dollar when pricing oil. Those gains, However, were short lived.

“If it happens, it’s huge.” said Joe Manimbo, a currency trader at Ruesch International in Washington, D.C. “Trade is thin ahead of G7 and those headlines really hit.”

Finance ministers and central bank heads at the Group of Seven rich nations will meet on Saturday.

SLOWDOWN SPREADS TO EUROPE

The ECB kept its key interest rate at 4 percent on Thursday, but the bank’s president, Jean-Claude Trichet, dropped a threat to act preemptively against rising prices and accepted that unusually high uncertainty in markets may hurt the euro zone economy.

“It became clear this week that the economic slowdown has been moving East and that Europe is not insulated,” said Mark Meadows at Tempus Consulting in Washington, D.C. “The euro suddenly came under pressure and it may continue so for a while.”

Although the euro is now about 5 cents — or 3 percent — below last November’s record high versus the dollar, it is still more than 10 percent higher than a year ago. On the ECB’s trade-weighted basis, it is holding just below all-time peaks set in January EUREER=ECBF.

Trade was relatively quiet, with many Asian players away for the Lunar New Year break. Financial markets in Tokyo will be closed on Monday for a national holiday.

Sterling was up 0.1 percent versus the dollar at $1.9455 GBP=, recovering some of Thursday's losses sustained after the Bank of England cut rates by 25 basis points to 5.25 percent and signaled it would likely stick with a path of gradual monetary easing.

The Canadian dollar was one of the biggest movers on the day, after strong Canadian employment data. The U.S. dollar fell 1 percent to C$0.9992 CAD=.

Still, positive views on the dollar were easier to find despite fears of a recession.

“We continue to favor the dollar this year,” Mansoor Mohi-uddin, a currency strategist at UBS, said in a note. “Risk aversion will deter U.S. investors from buying overseas assets, and interest rate cuts in the rest of the world will ease the dollar’s cyclical undervaluation,” (Additional reporting by Vivianne Rodrigues; editing by Leslie Adler)

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