Dollar gains against euro on signs US economy recovering from subprime

HONG KONG (Thomson Financial) - The US dollar gained against the euro in afternoon trade in Asia on Thursday, on signs that the US economy is recovering from the subprime mortgage crisis, reducing chances that the Federal Reserve would further cut interest rates.

Recent economic data showed that the services industries continued to grow in September, while most investors are predicting that Friday's jobs report will show that the labor market has added 100,000 new jobs after an unexpected 4,000-job decline in August.

'Now, the market is beginning to doubt whether there will be another rate cut, especially if we see a strong jobs report tomorrow,' said Mark Wan, vice president for treasury at DBS Bank in Hong Kong.

'If the jobs figures are strong, then the dollar may rebound' to the 1.39 level against the euro, Wan said. 'This is the good opportunity to buy the dollar.'

At 1 pm, the euro shed earlier gains and was trading at 1.4090 dollars, down from 1.4097 in Sydney this morning. The euro, which traded at 1.4085 dollars in late New York trade, fell to as low as 1.4079 dollars at noon .

The dollar was trading at 116.48 yen, down from 116.74 this morning and from 116.75 late last night.

'The credit market in the US is stabilizing and the equity market is getting stronger, so there is very little momentum for the euro to appreciate against the dollar,' said Thomas Lam, treasury economist at United Overseas Bank (other-otc: UOVEY.PK - news - people ) in Singapore.

Both Wan and Lam are predicting the Fed will follow its Sept 18 half -point rate cut with another quarter point reduction by year end.

'If the Fed indeed cut its rates, then it won't hurt the dollar anymore because that has been largely discounted by the market,' Wan said.

'But if they don't reduce the rates, then that will provide a very strong support for the dollar,' Wan said.

Concerns aired by European policy makers, politicians and businessmen on a strong euro are also weighing down the euro, Wan said.

The European Central Bank is expected to keep its interest rate unchanged at 4 percent when policymakers announce a decision later today.

The yen's gains against the dollar were anchored on optimism that the US economy will not slip into a recession, helping boost demand for Japanese cars, computers and other goods.

'If the US continues to grow, that will benefit the yen,' Wan said, who is forecasting the yen to rise to 114 to the dollar by year end.

Japan ships about 20 percent of its total exports to the US.

John Noonan, an analyst at Thomson IFR, said traders are supporting the dollar in anticipation of a strong rebound in non-farm payroll figures. But an increase of less than 100,000 might see the greenback ''start to swoon lower again''.

Still, the immediate risk to the dollar is the European Central Bank and Bank of England meetings on Thursday.

While both banks are expected to hold rates at current levels, the dollar could come under pressure if European Central Bank head Jean-Claude Trichet indicates a tightening bias.