(Updates prices, adds comments)
By Kevin Plumberg
NEW YORK, Jan 31 (Reuters) - The dollar rose on Thursday,
with dealers focused primarily on cutting back bets against the
currency a day ahead of the January U.S. employment report,
which could shed light on how close the economy is to a
recession.
The dollar fell sharply on Wednesday after the U.S. Federal
Reserve cut its benchmark interest rate by a half-percentage
point, for a total reduction of 1.25 percentage points in a
little more than a week.
But dealers began taking profits on that move overnight,
especially with fears growing that the credit crisis that began
in the United States is now growing overseas, muddying the
near-term direction for the dollar.
"Risk aversion is supportive of the dollar," said Samarjit
Shankar, global foreign exchange strategist with Bank of New
York Mellon in Boston. "There's still a lot of hesitation and
uncertainty on the part of global investors and as long that
persists, we expect the dollar to be supported."
The euro slipped 0.3 percent from late Wednesday to $1.4840
<EUR=>, but it touched an intraday high of $1.4914, according
to Reuters data. The all-time high is a little more than a cent
away at $1.4966.
The dollar edged up 0.2 percent to 106.65 yen <JPY=>,
moving in lock-step with U.S. stock indexes. The euro was
largely unchanged on the day at 158.30 yen <EURJPY=>, after
early losses.
The dollar climbed 0.1 percent to 1.0842 Swiss francs
<CHF=> after earlier touching a record low of 1.0759 francs,
while the euro was down 0.1 percent to 1.6090 francs
<EURCHF=>.
"We're primarily trading off of risk aversion and the view
that the credit crisis may be spreading, so that's causing
carry trades to unwind and putting pressure on European
currencies," said Michael Malpede, senior currency strategist
with Man Global Research in Chicago.
"There's the perception that the Fed is getting ahead of
the curve on the economy and Europeans may be lagging a bit.
... We may be getting to the bottom of our crisis and they may
be just about to confront theirs," he said.
Carry trades, in which investors borrow in a low-yielding
currency such as the yen to buy higher-yielding ones, were the
most dominant strategy in the currency market until last summer
when a crisis in the U.S. subprime mortgage market erupted.
Dealers were careful about making large bets ahead of the
monthly U.S. employment report on Friday. Economists expect the
U.S. economy to have added 63,000 jobs in January after
creating only 18,000 jobs in December, but weekly jobless data
that showed the biggest spike in more than two years on
Wednesday kept traders guessing.
The Fed cut its federal funds target rate a half percentage
point to 3 percent on Wednesday, its second aggressive easing
in barely more than a week, marking 225 basis points of cuts
since September.
That leaves the benchmark U.S. rate the lowest among
developed countries except Japan and Switzerland, and the Fed
warned more cuts may be needed to shore up the weakening U.S.
economy. Provided investors are willing to take risks, lower
interest rates would reduce the attractiveness of keeping
assets denominated in dollars.
Still, the situation in Europe was hardly better. To the
dismay of the European Central Bank, inflation in the euro zone
rose to an all-time high in January while economic sentiment
plunged to two-year lows, setting up a scenario of stagflation,
one of the biggest banes for investors.
"Euro bullish investors rely on the ECB not to cut interest
rates early, but the longer the ECB fights inflation, the
darker the European growth outlook becomes," strategists with
BNP Paribas said in a note. "Hence, the euro has little
long-term support and is facing increasing downside risks."
(Editing by Dan Grebler)
