Dollar slips broadly, traders await ECB and BoE

By Naomi Tajitsu

LONDON (Reuters) - The dollar slipped across the board on Thursday as traders locked in profits from its dramatic gains in past weeks, while investors awaited interest rate decisions by the Bank of England and the European Central Bank.

The dollar was set to break a five-day winning streak against the euro which drove the single currency to an eight-month low on Wednesday, as traders awaited comments by ECB President Jean-Claude Trichet after the rate announcement.

The ECB is seen leaving rates unchanged at 4.25 percent and is expected to issue a new set of economic projections while rejigging collateral rules. Its rate announcement will come at 7:45 a.m. EDT, ahead of Trichet's news conference at 8:30 a.m. EDT.

Analysts expect Trichet to balance his acknowledgment of lower growth by maintaining a tough tone on knock-on inflation effects.

"On the whole, we see Trichet keeping his hawkish stance," said Paul Robson, a strategist at RBS Global Banking.


He added that a downward growth forecast and a higher inflation outlook, as well as the new collateral rules would provide a varied mix of policy issues for markets to mull, which could add to volatility in the euro.

"Although it could potentially be a day of unchanged rates in Euroland and the UK, with the ECB press conference, it could turn out to be an interesting day."

Central bank rate decisions were the theme of the day, with Sweden's Riksbank raising rates by 25 basis points to 4.75 percent in a widely expected move.

But it also forecast that borrowing costs will fall in the future, which put the Swedish crown under selling pressure.

The euro rose 0.1 percent to $1.4510, pulling back from $1.4384 hit the previous day for the first time since January. The dollar inched up a touch to 108.50 yen.

The dollar index .DXY slipped 0.1 percent as the U.S. currency was also weighed by a 0.4 percent rise in oil prices, which were recovering from a roughly 9 percent fall so far this week.

Sterling rose 0.4 percent to $1.7820 before the BoE is seen holding rates at 5 percent, although a cut is seen in the works later to shore up an ailing economy. Such a view drove the UK currency to a 2 1/2-year low on Wednesday.

The euro rose 0.2 percent to 9.4761, having recovered from an earlier, initial slide after the Riksbank announcement.

TRICHET COMMENTS AWAITED

Along with the forecasts on growth and inflation, investors eyed changes to collateral rules as the ECB appears set to put a stop to banks exploiting current rules on swapping complex, untraded and near impossible-to value assets for ECB funds.

Traders said that the biggest risk facing the euro heading into Trichet's press conference was the possibility that he may appear more cautious on the outlook for the euro zone economy, which could underscore expectations for an eventual rate cut.

Much of the dollar's ferocious gains in the past month have been driven by the view that ongoing weakness in the U.S. economy, which had dogged the currency, was bound to have a negative impact on the state of the global economy, including the euro zone and the UK.

But some analysts argued that the ECB Governing Council would emphasize that it will stick to its inflation-fighting mandate, and that price risks remain high despite a slip in consumer prices, which may further postpone a rate cut.

"It may be that a dip in July CPI and lower oil prices suggest inflation has peaked," analysts at Calyon wrote in a research note.

"But recent rhetoric from other Governing Council members has surprised on the hawkish sides and with the bank still concerned about the threat posed by a wage price spiral it is difficult to envisage Trichet diverging from this tone today."

Figures derived from Eonia rates indicate the market does not anticipate a rate cut until at least the middle of 2009, despite signs of a slowing economy.

(Editing by Stephen Nisbet)