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Dollar up on commods slide, index hits 2008 high

LONDON - The dollar renewed its broad rally on Tuesday, lifted to its highest 2008 level against a basket of currencies by falling commodity prices and continuing worries about slowing global economic growth.

The euro hovered around a six-month low versus the dollar hit earlier in the day, unable to sustain initial gains made on a surprisingly strong rebound in German investor sentiment, as the data did little to quell worries about weakness in the euro zone economy.

Falling equities, another wave of concern over the global financial system and tightening strains in money markets are all feeding the view that the weak growth and fragile asset markets seen in the United States are being replicated elsewhere.

This has triggered a dramatic rally in the dollar this month, while fairly resilient readings on U.S. sentiment and output have contrasted with disappointing economic figures from other parts of the world, including the euro zone and Britain.

"The dollar is broadly benefitting from negative news from the rest of the world," said Adam Cole, global head of currency strategy at RBC.

"On the whole, it's still the case that virtually all the activity data in the world outside the U.S. has surprised on the downside, while U.S. economic figures are coming in on the upside."

However, the ZEW economic research institute's gauge of expectations for Germany rose to -55.5 in August from July's record low of -63.9, exceeding expectations for a modest gain to -62.0.

At 0953 GMT the euro was down 0.23 percent on the day at $1.4665, having earlier in the global session hit a six-month low of $1.4631, according to Reuters data.

The euro initially jumped to around $1.4690 after the ZEW survey, but was unable to hold those gains, with market participants saying that some in the market had been expecting a stronger-than-forecast figure.

The dollar index, which measures its value against a basket of six currencies, was up 0.2 percent to 77.233, having earlier hitting a new high for the year of 77.413.

The dollar retreated 0.1 percent against the yen to 109.95 yen, dragged lower by the euro's slide against the Japanese currency to 161.03 yen, a three-month low.

Sterling was one of the day's biggest losers, sliding as much as half a percent on the day to $1.8538 and approaching a two-year low. Some analysts said that sterling losses were the catalyst for dollar gains in the European session.

The dollar was supported after U.S. crude oil prices fell roughly a percent to $111.80 a barrel, while metals prices also came under selling pressure.

European shares were down 1.4 percent on the day, following the decline in Asian shares to 2-year lows and a sharp slide on Wall Street on Monday.

Rate cuts?

The latest dip in commodity prices lightens inflationary pressures, thus paving the way for central banks around the world to cut interest rates.

The central banks most likely to cut rates in the coming months are those in Europe, Australia and New Zealand, thus putting downward pressure on their currencies versus the dollar.

But one central bank likely to keep rates on hold for some time, as it did on Tuesday, is the Bank of Japan, whose base rate remains 0.5 percent.

"The strength in the dollar index has little to do with dollar strength but more the weakness of the other currencies," said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.

"The market's focus is just very one-sided. At the moment the market has decided to focus on the weakness of the euro zone and hasn't taken a balanced view of risks in the U.S.," he said.

Renewed concerns the U.S. Treasury might have to bail out loss-making mortgage giants Fannie Mae and Freddie Mac, on top of a 7 percent fall in Lehman Brothers shares on fears of heavy third quarter losses, suggest all is not well in the U.S. financial system.

The next main focus for investors is the July report on U.S. building permits and housing starts at 1230 GMT.

This will be help to clarify whether the U.S. housing market -- widely considered to be at the root of the year-long global financial crisis and a major hurdle to a U.S. recovery -- is close to a bottom.