September 4, 2008 / 4:55 PM / in 9 years

FOREX-Dollar soars to highest level this year vs euro

* ECB downgrades growth view, stoking rate-cut speculation

* ECB, Bank of England keep rates steady

* Euro zone’s Juncker: Euro still effectively overvalued (Recasts, adds comments and details, updates prices)

By Wanfeng Zhou

NEW YORK, Sept 4 (Reuters) - The dollar rallied on Thursday to its highest level against the euro this year after the European Central Bank cut its growth outlook for the euro zone, stoking speculation of lower interest rates in the region.

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

Euro zone economic uncertainty was “particularly high,” the European Central Bank president, Jean-Claude Trichet, said after the ECB left its interest rates at 4.25 percent on Thursday. But Trichet cautioned that inflation remains high and the risks are to the upside. For more details, see [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. “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 1.1 percent to 1.7 percent, for a midpoint of 1.4 percent, and at 0.6 percent to 1.8 percent in 2009, for a 1.2 percent midpoint.

Three months ago, the ECB had predicted economic growth of about 1.8 percent this year and 1.5 percent in 2009. See [ID:nL4276616].

In midday trading in New York, the euro EUR= tumbled 0.9 percent on the day to trade at $1.4362, after falling as low as $1.4327 earlier, the lowest level since December 2007, according to Reuters data.

The euro also fell against the yen to its lowest level since March and last traded at 154.83 yen, down 1.3 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 0.6 percent to 78.520.

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

The dollar JPY=, however, fell 0.5 percent against the yen to trade at 107.80, hurt by sharp losses on Wall Street.

“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 back drop.”

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. See [ID:nN03319921] [ID:nN03319921].

A separate report showed the U.S. service sector expanded slightly more than expected in August. See [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.

Elsewhere, sterling GBP= fell 0.2 percent to $1.7716, 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=.

Central bank rate decisions were the theme of the day, with Sweden’s Riksbank raising rates by 25 basis points to 4.75 percent in a widely expected move.

The euro EURSEK= recently traded down 0.1 percent against the Swedish crown at 9.4648 crowns. (Additional reporting by Nick Olivari; editing by Leslie Adler)

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