Euro hits 5-week high as it rises above US$1.12

London

THE euro rose above US$1.12 for the first time in more than a month on Tuesday while a cut in Australian interest rates failed to weaken the Australian dollar as the fallout of poor GDP (gross domestic product) data continued to weigh on its US equivalent.

The yen hit its strongest in three weeks, pushing past 102 yen per dollar for the first time since early July after Japan's cabinet approved a package of spending including 13.5 trillion yen (S$178.3 billion) in new fiscal measures.

The dollar has been sold steadily since surprisingly weak US second-quarter growth numbers last week, and dealers said that even some improvement in US bond yields overnight had failed to turn that around. "Basically the dollar is just being sold," said Alvin Tan, a strategist with Societe Generale in London. "We have had a moderate dollar uptrend until the end of last week, but the combination of the dovish Fed (US Federal Reserve) and surprisingly weak second-quarter numbers have caused some profit taking."

The dollar index against a basket of six major currencies stood at 95.466, having fallen as low as 95.384 last week when it posted its biggest fall in three months.

Against the yen the dollar eased 0.6 per cent to 101.76 yen . It was down 0.3 per cent at US$1.1191 per euro, having traded as weak as US$1.1208 per euro.

Weaker-than-expected US manufacturing data on Monday added to a new bout of gloom over global growth and nerves over the fate of banks in Europe were also high on the agenda as German banking shares fell.

Futures markets now price in less than a 40 per cent chance of a rise in official US interest rates by December and the currency world's biggest banking player, Citi, said that the largest flows in the past week had been into the euro and out of the dollar.

In theory, worsened growth prospects should strengthen expectations of yet looser monetary policy in Europe and Japan and hence bode ill for the yen and the euro.

But while fiscal stimulus should also carry with it the risk of inflation and rising domestic share prices - factors that should weaken the yen - Tuesday's moves look like an expression of doubts in markets that it will manage to stimulate growth at all. REUTERS