* Dollar rallies, euro and sterling hurt by poor data
* Some speculation of ECB rate cut pushes euro lower
* Rate differentials move in favour of United States
By Anirban Nag
March 1 The dollar rose to a six-month high
against a basket of currencies, buoyed by gains against the euro
on growing evidence the U.S. economy was showing signs of
improving even as the euro zone struggles.
Traders said poor economic data in the euro zone, along with
cooling inflation and growing risks that political instability
in Italy would push up borrowing costs for struggling European
countries could combine to exert pressure on the European
Central Bank (ECB) to lower interest rates in coming months.
That is likely to keep the euro weak.
Interest rate spreads between two-year U.S. government bonds
over their German counterparts were moving
in favour of the former, offering another reason to investors to
buy the dollar. More and more investors are expecting the
Federal Reserve to slow its asset purchase programme later in
the year as the U.S. labour market shows signs of improvement.
Investors were also focused on $85 billion in U.S. budget
cuts that are due to start on Friday, although concerns about
the impact on the world's largest economy could merely encourage
investors to buy the highly liquid dollar as a safe haven.
Data on Thursday supported the dollar, showing a drop in new
claims for jobless benefits in the U.S. last week and a sharp
rise in factory activity in the Midwest. In contrast,
joblessness in the euro zone rose to a all-time high while
business surveys showed manufacturing activity was sluggish in
The dollar index rose 0.3 percent to 82.228, its
highest level since late August. It gains came as the euro
fell to near its lowest in nearly two months of $1.3014,
with option barriers at $1.3000 appearing vulnerable.
The euro posted its largest monthly fall against the dollar
in nine months in February after an inconclusive Italian
"When you look across Europe, you see high unemployment,
barely any growth, apart from Germany, and rising debt levels,"
said Howard Jones, advisor at money mangers RMG Wealth
Management. "What Europe needs is growth and easier monetary
"The U.S. data in comparison is much better than Europe and
to us, the dollar is a buy. We expect the euro to ease towards
the mid-$1.20s in the next two months."
Speculation that the ECB may cut rates in coming months
gathered pace after benign euro zone inflation data.
That talk along with renewed worries about
rising borrowing costs for struggling euro zone countries would
make the euro a sell into rallies, analysts said.
"We are recommending clients to cautiously scale in long
euro/dollar positions at this level. But we should not fool
ourselves, this (Italian situation) could still go really bad,"
said Arne Lohmann Rasmussen, head of FX research at Danske Bank
DOLLAR ON TOP
A last-ditch deal to avert the U.S.budget cuts, due to start
on Friday, is seen as highly unlikely.
The International Monetary Fund said it would probably cut
its U.S. and global growth forecasts if those automatic spending
cuts take effect on Friday, and warned that the United States'
biggest trading partners would be hardest hit.
Despite the spending cuts hurting growth in the United
States, the economy there is not expected to perform as badly as
the euro zone, Britain and Japan, which are all battling
recession or deflation, giving the dollar a boost.
"The end of 2012 has likely seen the low in real U.S.
yields. This suggests the Fed is unlikely to do further easing
measures," Deutsche Bank said in a note.
It added that even if the Fed did ease more, other central
banks like the Bank of Japan were catching up with Fed easing,
pushing down the value of their currencies against the dollar.
The dollar rose to a six-week high against the Swiss franc
and was up 0.4 percent at 92.95 yen.
It also rose to a 2-1/2 year high against sterling
after a shock contraction in manufacturing activity in February,
raised expectations that the Bank of England will announce fresh
monetary easing as early as next week.