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    Monday, April 14, 2008

    Reuters - Dollar flat as bleak U.S. outlook offsets G7 impact

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    Dollar flat as bleak U.S. outlook offsets G7 impact

    Monday, Apr 14, 2008 8:14PM UTC

    By Steven C. Johnson

    NEW YORK (Reuters) - The dollar was little changed on Monday as more banking sector stress added to worries about the U.S. economy, overshadowing a Group of Seven warning on the threat sharp exchange rate moves pose to financial stability.

    A surprise first-quarter loss at Wachovia Corp <WB.N>, the fourth-largest U.S. bank, suggested more credit market turmoil ahead, prompting traders to sell dollars, mostly against the euro and sterling.

    That helped wipe out dollar gains seen after finance officials from the G7 developed countries on Friday expressed concern about sharp currency fluctuations, the first change to the group's boilerplate foreign exchange language since 2004.

    The dollar had rallied briefly overnight on the view that G7 countries may start buying the dollar to slow its decline.

    By Monday in New York, though, investors were betting the G7 would not back up its words with action, especially with the Federal Reserve likely to cut interest rates further to support a U.S. economy many fear may already be in recession.

    "At the end of the day, they didn't mention the dollar directly, they didn't talk about intervention, and unless the Fed is willing to end its easing cycle, there's little (the G7) can do," said Mark Frey, head currency trader at Custom House, a global payments dealer in Victoria, British Columbia.

    Analysts said the statement may slow the dollar's decline, but would not alter the currency's broad weakness.

    Late in the afternoon, the euro was trading at $1.5806, near its closing level on Friday. It fell as low as $1.5670 after the G7 statement but also traded up at $1.5885, not far from an all-time high above $1.59.

    Sterling rose 0.3 percent to $1.9758, while the dollar edged up 0.1 percent to 101.04 yen after earlier falling to 100.31 following news of Wachovia's losses.

    The dollar got some support on Monday from data showing U.S. retail sales for March unexpectedly rose, though details of the report suggested the headline number was driven mainly by soaring gasoline costs, not by resilient consumers.

    FED STILL LIKELY TO EASE

    The Fed has cut the benchmark interest rate by 300 basis points since credit turmoil began in late August and is likely to reduce it again when it meets later this month.

    The European Central Bank, meanwhile, has held rates at 4 percent for more than a year, and comments from policy-makers on Monday clearly indicated the bank's lack of interest in cutting rates, adding additional support to the euro.

    ECB Governing Council member Yves Mersch was quoted on Monday as saying there is no room for rate cuts this year.

    Any official attempt to weaken the euro and boost the dollar would run up against the respective monetary policies of the two central banks, limiting the impact of intervention.

    In addition to Wachovia, Merrill Lynch & Co Inc <MER.N> and Citigroup Inc <C.N> are due to report first-quarter results later in the week, and analysts say both banks may announce billions of dollars in write-downs.

    "We had gone through a period in recent months in which the Fed's focus seemed to be shifting away from financial stress and toward economic stress, but the Wachovia announcement puts financial stress back into the Fed policy mix," said Robert Sinche, head of liquid products strategy at Bank of America in New York.

    He said that means investors are likely to make another run at pushing the euro to a new record peak around $1.60, particularly as the Fed's April 29 meeting draws near.

    (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler)

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