20000226Slumping euro finds little solace as Dow drops

NEW YORK: The euro slumped back beneath the $1.00 level on Thursday as prospects for a near-term European interest rate hike dimmed and US technology stocks again surged to a new record high.

The euro fell almost 2 percent from Wednesday's one-month peaks to just below 99 cents overnight, giving up virtually all the ground it gained this week, before scrambling back a bit as US blue-chip stocks tumbled sharply at midday.

Soaring US technology stocks sparked the euro's woes on Wednesday, and selling gained steam after European monetary officials threw cold water on growing speculation of an imminent hike in European interest rates.

The selloff was so swift that even severe losses by the Dow Jones industrial average, which at one point crumbled below the 10,000 level for the first time since last October, failed to carry the euro much above the 99.50 level in New York trading.

"Even if money is coming out of the Dow, it may not be coming out of the dollar," said Seth Garrett, global head of spot trading at Credit Suisse First Boston.

"The Nasdaq is more important from a flow-of-funds point of view because people, including foreign investors, are more interested in investing in technology," Garrett said.

Many analysts are keeping a close eye on US equity prices, saying a correction on Wall Street may hurt the dollar due to the US economy's reliance on foreign capital inflows to finance a colossal trade deficit.

US blue-chips regained their poise late in the day, with the Dow cutting its sharp losses to around 1.3 percent to close at 10,093 while the tech-heavy Nasdaq index climbed to yet another record of 4,618, dragging the euro back to close at 99.29 cents.

David Gilmore, partner at FX Analytics, said the market had been caught wrong-footed by remarks by European central bankers on interest rates following the euro's powerful rally on Tuesday to above the $1.00 level for the first time in a month.

European Central Bank vice president Christian Noyer dampened speculation that another rate hike was imminent when he said financial markets may be misinterpreting the ECB's February bulletin and recent statements by ECB members as preparing markets for a near-term interest rate hike.

In addition, Bundesbank board member Klaus-Dieter Kuehbacher was later quoted by a newswire as saying he did not expect an ECB tightening before April.

"People were beginning to price in a March 2 rate hike. We were suggesting that a quarter-point hike was a risk. That's pretty much been taken off the table and there's some disappointment there," Gilmore said.

Earlier this month the ECB surprised markets by pushing its key refinancing rate up a quarter point to 3.25 percent when a fast-falling euro threatened to help import inflationary pressures.

The euro also shed more than 0.90 percent against the yen, closing at 110.35. The yen's gains helped the Japanese currency hold the dollar around half a yen below Tuesday's 111.73 six-month peak.

The dollar closed at 111.27 yen JPY, nearly unchanged from its Wednesday close of 111.19 yen.

The yen has been hurt as traders focus on Japan's weak economic recovery and huge government debt, seen as a risk to its sovereign credit rating.

US rating agency Thomson Financial BankWatch on Thursday affirmed Japan's sovereign risk rating at AAA with a stable outlook, but last week's warning of a possible downgrade by Moody's Investors Service continued to weigh on yen sentiment.

Earlier, worse-than-expected Japanese national retail sales data for January pressured the yen. Japan's nationwide retail sales slid for a 34th consecutive month, dipping 2.2 percent in January from a year earlier.-Reuters