WORLD FOREX: Dollar Slips Vs. Euro As Low Rates Trump Bin Laden Rally

By Erin McCarthy
   Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Osama bin Laden's death may have rippled through global markets on Monday, but the dollar slipped against the euro once again, pulled down by yield differentials and the Fed's loose monetary policy.

As market participants looked past bin Laden's death and toward the European Central Bank's rate-setting meeting Thursday, interest-rate differentials returned as the primary market driver, helping the euro advance against the dollar.

"While the killing of bin Laden has encouraged patriotism, it doesn't necessarily change the factors that are dollar-negative," said Jessica Hoversen, fixed income and foreign exchange analyst at MF Global.

The U.S. Federal Reserve is expected to keep rates ultra-low much longer than most of the world's major central banks, giving markets little reason to choose the dollar over higher-yielding currencies, analysts said.

The euro rose above the $1.49 mark against the dollar, its highest level since December 2009. Against the Swiss franc, the dollar slipped intraday near fresh all-time lows, as the safe-haven Swiss franc benefited from worries about possible retaliatory attacks by radical groups.

The Australian dollar, meanwhile, touched fresh post-float highs against the U.S. dollar, but was unable to hold onto gains.

Late Monday, the euro was at $1.4830 from $1.4806 late Friday, according to EBS via CQG. The dollar was at Y81.24 from Y81.20, while the euro was at Y120.44 from Y120.28. The U.K. pound was at $1.6658 from $1.6708. The dollar was at CHF0.8652 from CHF0.8653.

The ICE Dollar Index, which tracks the U.S. dollar against a trade-weighted basket of currencies, was at 73.029 from about 72.933.

Analysts say dollar weakness will likely continue in coming weeks as the rate outlook for the U.S. is unlikely to change.

"The dollar will continue to remain under pressure as long as U.S. rates remain low and the prospect of a rate rise is pushed off farther into the future," said John McCarthy, manager of currency trading at ING Capital Markets in New York.

The euro, however, could test the psychologically key $1.50 level ahead of Thursday's ECB rate meeting, analysts said.

The ECB is widely expected to keep rates on hold, but ECB President Jean-Claude Trichet could signal that further rate hikes will occur, which would add support for the euro.

Against the Swiss franc the dollar slipped within striking distance of new all-time lows, but later pared losses. Safe-haven flows and expectations that the Swiss National Bank will raise rates ahead of the Fed had helped drive the Swiss franc's gains.

The U.S. dollar, however, was able to gain against the Canadian dollar, amid political uncertainty ahead of Canada's election results.

The possibility of a coalition government made up of the left-of-center New Democratic Party and Liberal party has weighed on the country's currency and encouraged some profit-taking, analysts said.

The Australian dollar set a new 29-year high at $1.1014 against the U.S. currency on the back of rising commodity prices, but pared gains later in the session. Australia's central bank on Tuesday will announce its decision on interest rates, which it is expected to keep on hold.

Ahead of the ECB's policy meeting and U.S. nonfarm payrolls data later this week, the dollar is likely to keep declining, analysts said.

"As long as the ECB is hawkish and the growth picture in Asia looks firm, the dollar-selling seems to be in place, irrespective of whether U.S. numbers are weak or strong," says Steven Englander, head of G10 strategy at Citigroup.