September 3, 2008 / 4:14 PM / 11 years ago

FOREX-Dollar surges as data show euro zone weakness

* Euro tumbles to lowest against the dollar since January

* Dollar continues to benefit from global economic jitters

* U.S. factory orders rise more than expected in July (Updates prices, adds details)

By Wanfeng Zhou

NEW YORK, Sept 3 (Reuters) - The U.S. dollar on Wednesday surged to its highest level against the euro since January, extending its recent bull run on growing expectations the American economy would outperform that of Europe.

The dollar briefly augmented its gains versus the euro after a government report showing U.S. factory orders rose more than expected in July added to signs of resilience in the U.S. economy. For more, see [ID:nN02444541].

“A good number,” said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey, referring to U.S. factory orders data.

“All in all, it will provide the dollar with longer term support. Not an immediately reactive number for the market but it fills in the picture of a moderately recovering U.S. economy,” he added.

By contrast, euro zone data on Wednesday underscored a weakening economy in the region. Retail sales in July fell and data confirmed that the euro zone economy shrank in the second quarter, its first quarter-on-quarter decline since the data series began in 1995. For more, see [ID:nL2117725].

In midday New York trading, the euro EUR= fell 0.2 percent to $1.4485, after hitting a low of $1.4386 in intraday trading, its lowest since Jan. 22.

The ICE Futures U.S. dollar index .DXY, which tracks its performance against a basket of six major currencies, jumped to an 11-month high of 78.651, before pulling back to trade little changed at 78.039.

The dollar slipped 0.5 percent to 108.12 yen JPY=.

Sterling GBP= fell as low as $1.7669, crashing more than a full cent to its lowest since April 2006, before recovering slightly after figures showing an improvement in the UK services sector. The pound last traded down 0.1 percent at $1.7796.

A further drop in crude-oil prices, which have tumbled this week after Hurricane Gustav left energy facilities in the Gulf of Mexico mostly unscathed, also benefited the U.S. currency. Oil prices last traded down 1.2 percent at $108.34 a barrel CLc1.

Analysts said investors were increasingly getting on board with the greenback as a safer place to allocate cash compared with other currencies whose countries were further behind in terms of economic readjustment in the wake of the global credit crunch.

“It’s clearly a strong dollar story that continues this week,” said Vassili Serebriakov, a currency strategist at Wells Fargo in New York. “We’re still continuing to see liquidation of many remaining U.S. dollar shorts.”

On the U.S. economic front, the Federal Reserve is slated to release its Beige Book on regional economic conditions at 2 p.m. Eastern time.

CENTRAL BANK DECISIONS ON TAP

The European Central Bank and the Bank of England will issue separate interest-rate decisions on Thursday and both are expected to keep rates on hold. [ID:nL1358323] [ID:nL2593052].

The ECB has long reiterated that its main concern lies in taming inflationary pressures and that it will tighten policy if price risks remain high. But analysts say an increasingly bearish growth view may spur speculation of a possible rate cut in the future.

“The ECB’s increased acknowledgment of the widely anticipated technical recession in the euro zone is prompting bond markets to expect easing in 2009, the same year in which the Fed is widely expected...to begin raising interest rates,” said Ashraf Laidi, chief FX strategist at CMC Markets U.S..

Elsewhere, suspected dollar-selling intervention by South Korean authorities lifted the won from a four-year low on Wednesday, but they may not have done enough to stem the slide in Asia’s worst-performing currency this year. For more, see [ID:nSP344803].

The won recently traded down 1.5 percent at 1147.90 versus the U.S. dollar. (Additional reporting by Nick Olivari; editing by Walker Simon)

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