(Changes byline, updates prices, adds quotes)
By Simon Falush
LONDON, Feb 22 (Reuters) - The euro hit a two-week high
against a lacklustre dollar on Friday as above-forecast euro
zone service sector data contrasted with regional U.S. factory
activity putting on its weakest show since the last recession.
The euro zone services PMI rose to 52.3 in February from
50.6 the previous month, moving further away from the 50
watermark between contraction and growth and further dampening
expectations of near-term interest rate cuts.
That was in stark contrast to Thursday's Philadelphia Fed's
business index which fell to minus 24 in February, showing the
deepest contraction in activity since 2001 and much worse than
forecasts for minus 11. []
"The market today is focused on dollar selling," said Derek
Halpenny, senior currency economist at BTM UFJ.
"If you look at the inflation picture, the U.S. is the place
where the market is least concerned so it is the most likely to
see interest rate cuts."
U.S. markets are now fully pricing in a 50 basis point cut
at the Federal Reserve's next meeting in March to 2.50 percent
and factor in a small chance of an even bigger 75 basis points.
That would add to an unusually aggressive 125 basis points
of cuts in January as the Fed tries to fend off a recession in
the world's biggest economy. <FEDWATCH>
The euro rose to a two-week high of $1.4853 <EUR=>, from
around $1.4815 before the PMI data.
AMMUNITION FOR HAWKS
For the European Central Bank, investors now see less than a
50 percent chance of a cut by end-June -- compared to pricing in
almost two cuts on that time horizon a fortnight ago <FEIM8>.
"Clearly (the data) is much better than expected and at a
time when inflation remains of concern it supplies ammunition
for the hawks at the ECB, at least in the short term, which is
supportive of euro/dollar," said Michael Klawitter, currency
strategist at Dresdner Kleinwort in Frankfurt.
The rise in the euro dragged down the dollar index to a
two-week low of 75.418 <.DXY>.
The dollar fell 0.3 percent to 107.00 yen <JPY=>, while the
euro lost 0.15 percent to trade at 158.76 yen <EURJPY=>.
The yen drew some support from weaker equity markets
<> and shrugged off news that the Japanese government had
lowered its assessment of the economy [].
HEAD SOUTH FOR GROWTH
The Australian dollar strengthened by more than half a
percent to $0.9250 <AUD=>, hitting its highest level since
November.
It remains one of the best performing major currencies this
year, up over 5 percent, helped by expectations that interest
rates could rise further from an already high 7.0 percent.
It has also benefited from a surge in metals prices like
gold, which the country exports, as well as a partial revival of
carry trades, where investors borrow funds in the low-yielding
Japanese currency to buy higher-yielding assets.
"Investors are looking for the safest economies where there
are ... prospects of monetary tightening and it's difficult to
see evidence of a slowdown for Australia," said BTM's Halpenny.
The New Zealand dollar with interest rates at 8.25 percent
rose by 0.8 percent to US$0.8075, its highest since July <NZD=>.
(Editing by David Christian-Edwards)
