FOREX-Dollar hits new highs then slips on profit-taking

Mon Aug 11, 2008 4:51am EDT

(Recasts, adds comment and quotes, updates prices, changes byline and dateline. Previous: TOKYO)

* Dollar hits new multi-month highs but then slips back

* Profit-taking lifts euro back above $1.50

* Dollar entering sustained long-term recovery?

* Oil remains key variable

By Jamie McGeever

LONDON, Aug 11 (Reuters) - The dollar scaled new multi-month highs on Monday as traders reassessed whether the slowdown that has already hit the U.S. economy would show up elsewhere in the world but it then succumbed to sharp profit-taking.

The euro, which last week suffered its biggest weekly fall since its 1999 inception, fell almost as low as $1.49 earlier on Monday as the downward technical momentum intensified before snapping back to above $1.50.

Strong anti-inflation comments from a leading European Central Bank policymaker and a 1.5 percent rebound in oil prices helped take the gloss off the dollar's earlier rally and provided traders with the excuse to cash in on the month-long fall in commodities and dollar's latest surge [ID:nWEA5361].

ECB Governing Klaus Liebscher's warning that inflation remained high reminded investors that the ECB's main concern was still to tame inflation and pipeline price pressures.

But ECB President Jean-Claude Trichet's warning last week that the euro zone economy was facing tough times confirmed what many analysts had suspected -- the rest of the world is not immune to the economic pain being endured in the United States stemming from the year-long financial crisis.

"The market is recalibrating its expectations for global growth: we already knew the U.S. growth dynamic was weak, but other economies are now starting to feel the impact of high oil prices and weak housing markets in some areas," said Phyllis Papadavid, currency strategist at Societe Generale in London.

"We're seeing some recoupling, which is holding the dollar in good stead. But we're not necessarily convinced it's going to last because it's not been supported by good macro news in the U.S.. It has been a significant move and we've broken some important levels, but we're not convinced 'this is it'."

At 0815 GMT the euro was up 0.4 percent on the day at $1.5065 , rebounding sharply from the near six-month low of $1.4908 on the EBS platform in early Asian trade.

The dollar index, a measure of the greenback's value against a basket of six currencies, was trading at 75.550 .DXY. The index hit a six-month high of 76.192 earlier on Monday.

OIL THE FX KEY

Papadavid said the euro was likely to remain under pressure in the near term but could see some sporadic relief such Monday's rebound as traders buy euros relatively cheaply.

Despite Trichet's relative pessimism on the economic outlook after the ECB kept interest rates on hold at 4.25 percent on Thursday, he didn't sound like a policymaker advocating easier policy any time soon.

"Liebscher was on the hawkish side and that's been helping the euro," said Ian Stannard, senior currency strategist at BNP Paribas. But he added that the euro's rally was likely to be short-lived.

In the near term, the dollar looks poised to gain further ground, especially if traders continue to liquidate the long positions built up in commodities and non-dollar currencies over recent months.

Oil rebounded 1.5 percent to $116.90 a barrel CLc1 on Monday amid heightened tensions between oil-exporting giant Russia and former Soviet state Georgia, having hit a three-month low below $115 on Friday.

Oil prices could be key to the dollar near-term.

"The longer oil stays stable or lower, the more inflation-targeting central banks such as the ECB and the RBA (Reserve Bank of Australia) have been able to focus on downside risks to growth. Conversely if oil were to start creeping higher again in the absence of clear fundamentals, it would raise the risk of a partial reversal of recent moves," UBS strategists said in a note on Monday.

"As policymakers outside of the U.S. converge towards dovish positions, we believe the market will approach a period of consolidation as the dollar moves into new, stronger ranges across the board," they said.

The euro's weakness against the yen, meanwhile, helped keep the dollar down against the Japanese currency, off 0.25 percent on the day at 109.95 yen .

In terms of economic data, the UK economy takes centre stage Monday with the release of the latest producer prices and trade balance figures [ECON].