Dollar gains amid talk of Fed rate pause

NEW YORK: The dollar gained ground Thursday as speculation grew that the US Federal Reserve might soon call a halt to interest rate cuts while the European Central Bank may have to lower its rates. The euro, which on Thursday broke through the 1.60-dollar threshold for the first time, fell back to 1.5685 dollars at 2100 GMT from 1.5882 late Wednesday in New York. The greenback meanwhile rose to 104.22 yen from 103.51 Wednesday. While market participants expect the Fed to lower interest rates by a quarter point next week, expectations are building that it could then call a halt for the time being to any further cuts. Even a disappointing report on the US housing market failed to dent the dollar's newfound momentum. "Despite this continued weakness, the market is beginning to anticipate that the US Federal Reserve is approaching the end of its easing cycle, while the ECB may need to start easing interest rates," said Hilary Love at PNC Bank. "This view was strengthened by comments today by ECB President (Jean-Claude) Trichet saying that the bank is concerned that the euro's surge to record levels may hurt Europe's economy." John Kicklighter at Forex Capital Markets cited a "momentous shift in positioning (that) offers the first signs of a major reversal after more than two years of a solid bull trend" for the single European currency. A report showing that new home sales in the United States plummeted 8.5 percent in March to their lowest level in more than 16 years did little to challenge market speculation on future Fed policy. Ashraf Laidi, currency strategist at CMC Markets, said any signal from the Fed next week that the cycle of rate cuts could be coming to an end could herald the start of a significant recovery for the US currency. "In the event that the (Fed) shows any sign of reducing its easing policy, then currency markets will obtain the necessary green light to accelerate the buying in the dollar," he said. By contrast, the European Central Bank (ECB) is seen as coming under pressure to lower eurozone interest rates in the coming months following a much weaker than expected German business survey. The Ifo research institute said its April business climate index for Germany fell to 102.4 from 104.8 in March, well below forecasts of a decline to 104.3. In recent months economists have been surprised at the strength of Ifo surveys, providing support to the idea that the eurozone economy had "decoupled" from the United States and would weather the credit crunch relatively unscathed. But Thursday's findings and a weak eurozone manufacturing survey on Wednesday meant that many analysts were now questioning the health of the German economy, boosting expectations the ECB will be forced to cut interest rates in the coming months. "The Ifo figures out of Germany ... look very weak, which would stem inflation concerns slightly and may give room for the ECB to cut rates," said Mic Mills, a trader at TradIndex.com In late New York trade, the dollar stood at 1.0349 Swiss francs from 1.0162 on Wednesday. The pound was at 1.9744 dollars after 1.9797.