Dollar hits 2-year high vs sterling on growth worry

Britain’s gross domestic product was revised to show it was unchanged in the Q2 from an initial estimate of 0.2% quarterly growth, the worst quarterly performance since the Q2 of 1992.

The British data added to a gloomy economic outlook in the euro zone, reinforcing views that the European Central Bank could lower interest rates in the coming months. “The market’s near-term focus is sterling and oil, both of which could keep the dollar firm,” said a senior dealer at a European bank. “There is caution before this week’s housing data, and that may keep the dollar’s gains limited, but there’s also no reason to actively sell the dollar,” he said.

Sterling fell as low as $1.8405 its lowest since late July 2006. The fall in the pound also dragged the euro lower, with the single currency trading down 0.6% against the dollar at $1.4708 but still holding above a six-month low of $1.4630 hit last week. Trading was thin with British markets closed for a holiday.

 While the global economic slowdown and the outlook for monetary easing outside the United States were supporting the dollar, market participants remained skeptical about the dollar’s sharp gains due to persistent worries about the US financial system. In addition to problems at US mortgage finance companies Fannie Mae and Freddie Mac and speculation over investment bank Lehman Brothers traders will also be watching a slew of US housing data due this week -- existing and new home sales and two surveys of nationwide house prices.

“While the commodity markets are still volatile, they are no longer going through a one-way decline. Dollar buying momentum seems to be slowing under such conditions,” wrote Masafumi Yamamoto, head of forex strategy for Japan at Royal Bank of Scotland, in a note. The dollar is less correlated to commodities and instead the greenback is becoming more sensitive to US financial sector woes and their impact on US equity prices and bond yields, he said.

The slide by sterling earlier on Monday added to an unexpected buildup in short positions, possibly paving the way for the currency to rebound, some traders said. “While the overall tone remains solid, the dollar’s recovery is not smooth, as seen in the euro holding firmly above a recent low amid growing optimism about the dollar,” said a dealer at a another European bank.

Comments by influential investor Warren Buffett that he has no bets against the dollar also added to the dollar’s upward momentum. The dollar’s rise this month has been driven by players unwinding bets on the global economy weathering the US downturn and the credit crisis. In the process, investors have sold the euro, sterling, the Australian dollar and commodities. The dollar inched up 0.1% against the yen to ¥110.09. (Reuters)