By Chikako Mogi
TOKYO, Feb 22 (Reuters) - The dollar was stuck near two-week
lows versus the euro on Friday after data showing the weakest
regional factory activity since the last U.S. recession in 2001
boosted expectations for a large Federal Reserve interest rate
cut.
Many market players expect the Fed to slash overnight rates
by another 50 basis points at its next meeting in March to 2.50
percent, following an unusually aggressive 125 basis points of
cuts in January to help fend off a recession. <FEDWATCH>
The dollar has been hit the prospect of lower rates, which
would erode the currency's appeal to investors, just as market
players have scaled back expectations for the European Central
Bank rate cuts this year due to inflation pressures in the euro
zone.
"Investors still see more risk of dollar falling than
rebounding," said Shuichi Kanehira, a senior trader at Mizuho
Corporate Bank. "If dollar short-covering doesn't push the
currency up far enough, the market could resume testing its
downside."
The euro was little changed at $1.4802 <EUR=> <EUR=EBS>,
after climbing to a two-week peak of $1.4838 on Thursday.
Traders said some market players took profits in the single
currency earlier in the session, pushing it as low as $1.4789.
The dollar inched up 0.2 percent against the yen to 107.46
yen <JPY=> <JPY=EBS> after having fallen to a low of 107.15 the
previous day.
The dollar tumbled on Thursday after the Philadelphia Fed's
business index fell to minus 24 in February, showing the deepest
contraction in activity since 2001 and much worse than forecasts
for minus 11. []
Weekly jobless claims data also showed more workers were
remaining on U.S. state unemployment rolls. The four-week moving
average, which smoothes out fluctuations, surged to levels not
seen since October 2005.
AUSSIE SHINES
The Australian dollar remains one of the best performing of
major currencies this year, helped by expectations that interest
rates could rise further from an already high 7.0 percent.
The Aussie has also benefitted from the surge in metals
prices like gold, which the country exports, as well as a partial
revival of carry trades. In carry trades, investors borrow funds
in the low-yielding Japanese currency to buy higher-yielding
currencies and assets.
The Aussie edged up 0.2 percent to $0.9200 <AUD=D4>, holding
near a three-month peak hit earlier in the week, and climbed 0.3
percent against the yen to 98.84 yen <AUDJPY=R>.
Some traders said Japanese institutional investors were
selling foreign assets and repatriating funds before the end of
the current business year in March, limiting gains in the
Australian dollar, New Zealand dollar and sterling against the
yen.
While reduced volatility in currencies have encouraged some
investors to resume risky carry trades, traders said more time
was needed before risk appetite returned fully.
Implied volatility on dollar/yen <JPYVOL>, a gauge of how
much the options market expects the currency pair to move over a
given time frame, hovered on Friday near its lowest levels of the
year on a one-month basis.
"Speculators are currently leading the market, with real
money investors largely keeping to the sidelines because they
lack confidence in taking risks," said a general manager of
currency trading at a big Japanese trading house.
The general manager added that until stock markets show a
clear uptrend, currencies would remain in recent ranges.
In stocks, the Nikkei share average <> fell about 2
percent but is still up about 7 percent from its lows hit in late
January.
(Additional reporting by Satomi Noguchi; Editing by Eric
Burroughs)
