Dollar under pressure after Wall Street selloff

May 21, 2008

, TOKYO, May 21 – The dollar fell sharply against the yen in Asian trade on Wednesday after a slump on Wall Street and a spike in oil prices added to concerns about the outlook for the US economy, dealers said.

They said the euro was supported by speculation that the European Central Bank (ECB) might be forced to raise interest rates amid growing price pressures in the eurozone.

The dollar slid to 103.31 yen in Tokyo afternoon trade, down from 104.47 late Tuesday in New York.

The euro rose to 1.5663 dollars from 1.5645 but fell to 161.80 yen after 162.30.

The greenback skidded lower after US stocks took a beating Tuesday in the wake of worrisome inflation data and after oil prices struck a fresh record high above 129 dollars, dealers said.

"The Dow\’s decline again underlined uncertainties in the US economy," said Masaki Fukui, senior market economist at Mizuho Corporate Bank.

"Speculation about a widening interest rate differential between the dollar and other currencies also fuelled dollar selling. Although there is no imminent factor to further sell off the dollar, we wouldn\’t be surprised to see it fall below 103 yen at any time in the near future," Fukui said.

On Tuesday, Wolfgang Franz, a prominent academic and president of Germany\’s ZEW research institute, said the ECB might be forced to tighten credit in the coming months in the face of rising inflation.

His remarks came after the ZEW institute found that the German economy was being hampered by the strength of the euro and higher food and energy prices.

The ECB has kept its benchmark rate at a six-year high of 4.0 percent since last June, while the US Federal Reserve has slashed its key rates since September in the face of a housing slump and a related credit squeeze.

Dealers said the minutes of the Federal Open Market Committee (FOMC) meeting on April 29-30, to be released on Wednesday, may shed more light on the outlook for US interest rates.

A US government survey showed that US wholesale prices rose 0.2 percent in April while the so-called core rate of inflation excluding food and energy increased 0.4 percent.

The Fed cut its key interest rate by 25 basis points at the meeting, the smallest reduction this year, sparking speculation that US borrowing costs may have bottomed for now.

"If the FOMC minutes reinforce (the view) that the Fed is done cutting rates, this should provide a floor for the dollar," predicted NAB Capital analyst John Kyriakopoulos.

Against regional Asian currencies, the dollar declined to 1.3636 Singapore dollars from 1.3700 on Tuesday, to 30.46 Taiwan dollars from 30.54 and to 1,042 South Korean won from 1,043.

It fell to 31.86 Thai baht from 32.13 but rose to 9,309 Indonesia rupiah from 9,305 and to 42.73 Philippine pesos from 42.67.

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