Dollar continues weaker on growing expectations of further Fed rate cut

HONG KONG (Thomson Financial) - The US dollar continued its weak trend against the euro and the yen in afternoon trade in Asia on growing expectations of a further rate cut the by Federal Reserve next month following weak home sales data.

New home sales in the US declined 8.3 percent in August from a year earlier and most economists were predicting that the Fed will trim its benchmark rates by at least a quarter of a percentage point , helping revive the troubled housing market.

'The weak housing data confirmed in people's minds that the Fed is going to ease interest rates,' said Tim Condon, head of research at ING (nyse: IND - news - people ) Financial Markets in Singapore.

'While a rate cut is bullish for the equities and fixed-income markets in the US, unfortunately it is bearish for the US dollar,' said Condon.

At 1:00 pm (0500 GMT), the dollar was at 115.13 yen, down from 115.45 this morning in Sydney and 115.59 in late New York trade. The euro was at 1.4160 dollars, up from 1.4154 this morning.

The euro hit a record high of 1.4189 dollars Thursday.

The dollar will likely weaken to 115 yen and to 1.42 euro by year-end, before staging a recovery against the two major currencies in 2008, Condon said.

'The US economy will begin to recover in 2008 because of the rate cuts made this year and that will aid the dollar,' Condon said.

The dollar has been weakening against other major currencies including the euro after the Fed's unexpectedly steep half a percentage point rate cut on Sept 18, which made dollar-denominated assets less attractive to investors.

Other economic data that will be released this week are expected to give the Fed more reason to reduce its rates to keep the world's largest economy from slipping into a recession.

The US personal income and spending figures for August and construction spending data, due out later today, are not expected to point to any improvement in the economy.

GFT senior finance analyst Ian Copsey said the dollar has recovered from its lows in European trade, though the currency remains under pressure.

'General consensus is growing that the Fed will be forced to cut rates again and -- on the numbers seen last night -- there is little to suggest otherwise,' Copsey said.

The US economy grew at an annual rate of 3.8 percent in the second quarter, faster than the 0.6 percent expansion in the first quarter. The strong second-quarter growth was overshadowed by concerns that the economy would post slower growth in the second half of the year because of the subprime mortgage crisis that began around August.

Hong Kong 1:00 pm (0500 GMT)

US dollar

115.13 yen

1.1716 sfr

Euro

1.4160 usd

163.04 yen

1.6593 sfr

0.7000 stg

Sterling

2.0223 usd

232.85 yen

2.3696 sfr

Australian dollar

0.8829 usd

0.4364 stg

101.66 yen

New Zealand dollar

0.7573 usd