LONDON, Sep 22 (Reuters) The dollar hit a two-week low against the euro on Friday after a regional Federal Reserve survey pointed to a slowdown in the U.S. economy, reinforcing expectations U.S. interest rates have peaked.
The Philadelphia Fed's business activity survey for September posted its first negative reading in over three years, indicating a significant decline in manufacturing in the mid-Atlantic region.
Expectations that U.S. interest rates may have no further to rise from the current 5.25 percent contrast with investor views that the European Central Bank will raise interest rates a few more times from the current 3 percent by mid-2007.
''The Philly Fed indicates a broadening out of the pressure, from the housing market to wider parts of the economy,'' said Tim Fox, currency strategist at Dresdner Kleinwort.
''The market has priced in about a 50 percent chance of a rate cut in the first quarter of 2007, but it may start to bring forward timing for when rates are going to be cut, and that will be a burden for the dollar.'' The Fed left rates unchanged earlier this week for a second time in a row, after 17 straight increases.
By 1135 GMT, the euro was trading at $1.2816, up a third of a percent on the day but off an earlier two-week high of $1.2832.
The dollar was slightly lower at 116.24 yen, eyeing the previous day's two-week low.
The euro was up 0.3 percent at 149.11 yen.
Sterling hit a two-year high on the Bank of England's trade-weighted index and held firm against the dollar and euro on growing expectations of a November UK rate rise, to 5.0 percent.
FLEEING RISK The safe haven Swiss franc rose more than half a percent to a two-week high against the dollar and hit a one-week high against the euro on a sell-off in emerging markets.
''Dollar/Swiss has been the main mover today, that partly reflects emerging market tension,'' said Fox.
The Polish zloty hit a two-month low against the euro after news Poland's conservatives abruptly ended their rocky coalition with the leftist Self-Defence party.
The Turkish lira and Icelandic crown were down 1 percent, and the South African rand fell 1 percent to a three-year low.
The dollar's weakness contrasted with May/June, when a sharp sell-off in risky emerging market assets and commodities triggered a rally in the greenback.
''The price action could suggest that the dollar is beginning to act as a risk-averse currency, perhaps a warning sign that the markets are returning to the theme of external imbalances,'' said UBS in a note to clients.
However, some analysts said the dollar was also in part reaping the benefit of safe-haven flows.
''That's why the dollar is supported -- without the emerging market sell-off, the dollar would have been weaker,'' said Carsten Fritsch, currency strategist at Commerzbank Corporates and Markets in Frankfurt.
REUTERS PKS ht1817
The Philadelphia Fed's business activity survey for September posted its first negative reading in over three years, indicating a significant decline in manufacturing in the mid-Atlantic region.
Expectations that U.S. interest rates may have no further to rise from the current 5.25 percent contrast with investor views that the European Central Bank will raise interest rates a few more times from the current 3 percent by mid-2007.
''The Philly Fed indicates a broadening out of the pressure, from the housing market to wider parts of the economy,'' said Tim Fox, currency strategist at Dresdner Kleinwort.
''The market has priced in about a 50 percent chance of a rate cut in the first quarter of 2007, but it may start to bring forward timing for when rates are going to be cut, and that will be a burden for the dollar.'' The Fed left rates unchanged earlier this week for a second time in a row, after 17 straight increases.
By 1135 GMT, the euro was trading at $1.2816, up a third of a percent on the day but off an earlier two-week high of $1.2832.
The dollar was slightly lower at 116.24 yen, eyeing the previous day's two-week low.
The euro was up 0.3 percent at 149.11 yen.
Sterling hit a two-year high on the Bank of England's trade-weighted index and held firm against the dollar and euro on growing expectations of a November UK rate rise, to 5.0 percent.
FLEEING RISK The safe haven Swiss franc rose more than half a percent to a two-week high against the dollar and hit a one-week high against the euro on a sell-off in emerging markets.
''Dollar/Swiss has been the main mover today, that partly reflects emerging market tension,'' said Fox.
The Polish zloty hit a two-month low against the euro after news Poland's conservatives abruptly ended their rocky coalition with the leftist Self-Defence party.
The Turkish lira and Icelandic crown were down 1 percent, and the South African rand fell 1 percent to a three-year low.
The dollar's weakness contrasted with May/June, when a sharp sell-off in risky emerging market assets and commodities triggered a rally in the greenback.
''The price action could suggest that the dollar is beginning to act as a risk-averse currency, perhaps a warning sign that the markets are returning to the theme of external imbalances,'' said UBS in a note to clients.
However, some analysts said the dollar was also in part reaping the benefit of safe-haven flows.
''That's why the dollar is supported -- without the emerging market sell-off, the dollar would have been weaker,'' said Carsten Fritsch, currency strategist at Commerzbank Corporates and Markets in Frankfurt.
REUTERS PKS ht1817
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