January 5, 2009 / 2:38 PM / 12 years ago

FOREX-Dollar boosted by Obama stimulus, ECB rate cut view

* Dollar hits 3-week high vs euro

* Obama stimulus package providing dollar support

* Easing risk aversion, rising stocks boost dollar vs yen

* Slowing inflation seen denting euro ahead of ECB meeting (Adds comment, recasts, updates prices, changes byline, dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 5 (Reuters) - The dollar rose on Monday, boosted by increased expectations of interest rate cuts by major central banks and news of a planned U.S. stimulus package aimed at addressing the global financial crisis.

U.S. President-elect Barack Obama, seeking as much as $310 billion in tax cuts, is proposing that about 40 percent of the package worth up to $775 billion be in the form of tax breaks. For more see [ID:nN04350872].

“There are a couple of things helping the dollar and one of them is the Obama stimulus package,” said David Watt, senior currency strategist at RBC Capital Markets in Toronto. “The package is nothing new, but at least we are getting details about the plan. That is providing short-term support for the dollar because it caps the economic risk for the U.S.”

The euro, meanwhile, hit three-week lows versus the dollar, with weaker-than-expected Italian and Spanish inflation data and tax cuts in Germany seen raising pressure on the European Central Bank to cut interest rates further soon.

Sharp losses for the euro, which has shed more than 3 cents in the European session so far, also spread to euro/sterling, taking it well away from record lows for the pound last week and easing momentum towards parity.

“The euro has suffered from comments by an ECB official over the weekend,” said Omer Esiner, a senior market analyst at Ruesch International in Washington.

ECB Vice President Lucas Papademos said on Sunday more rate cuts may be needed to shield the euro zone economy from recession. [ID:nN04347375].

“His comments have dented some of the euro’s appeal by suggesting that lending rates could fall aggressively in the coming months, which is a bit of an about-face from recent remarks by other ECB officials, which had basically suggested a resistance to cut rates as aggressively as the U.S.,” Esiner said.

YEN AND RISK APPETITE

In early New York trading, the euro EUR= was down 2.1 percent on the day to $1.3584, having earlier hit $1.3556 -- its lowest since mid-December, according to Reuters data.

The euro also fell heavily to 93.56 pence EURGBP= against the pound — pulling the battered UK currency back from recent record lows near the brink of parity with the euro. It earlier hit 93.36 pence, the lowest since Dec. 22.

Figures on Monday showed Italian EU-harmonized consumer price growth slowed in December to 2.3 percent year-on-year from 2.7 percent in November, while similar Spanish data showed inflation tumbled to a 10-year low of 1.5 percent.

These numbers add pressure on the ECB to cut rates further when it meets meets next week to decide on monetary policy in the single currency bloc. Markets have largely priced in a half percentage point rate cut to 2 percent.

Investors also see the probability of borrowing costs falling more sharply, to 1.75 percent ECBWATCH.

“It will be important to closely monitor what (ECB President Jean-Claude) Trichet has to say in the next few days. The fundamental case for easing policy by at least another 50 basis points in January is strong,” Brown Brothers Harriman & Co said in a note to clients.

There are 100 basis points in a percentage point.

The yen, on the other hand, fell to more than three-week lows against the dollar amid improved risk appetite, with bargain prices and hopes for a global economic recovery this year prompting gains in European and Japanese stocks.

The Japanese currency had surged last year as investors sold all risky assets financed with the yen’s cheap rates.

The dollar JPY= climbed to 93.56 yen according to Reuters data, its highest since Dec. 8. It was last at 93.01 yen, up 0.9 percent.

The dollar index .DXY, measuring it against a basket of six major currencies, rose as high as 83.174, its strongest since Dec. 15. (Additional reporting by Veronica Brown in London; Editing by James Dalgleish)

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