NEW YORK -- The dollar rose to a 2008 high against the euro and a fresh 28-month high against the pound Thursday after the European Central Bank held its interest rate steady and cut growth forecasts for the euro zone.
The 15-nation currency dropped to $1.4331 from $1.4493 late in New York Wednesday after earlier touching a new 2008 low of $1.4319.
The ECB held its interest rate at 4.25%, as expected, as it struggles to balance accelerating inflation with slowing economic expansion. But the central bank cut its growth forecasts for 2008 and 2009 as it raised its inflation outlook. It said GDP growth in the euro zone would be from 1.1% to 1.7% in 2008, and from 0.6% to 1.8% in 2009, lower than previous estimates.
The British pound dropped to $1.7690 from $1.7759 after glancing off a fresh 28-month low of $1.7625. While the Bank of England also kept its key interest rate steady, at 5%, rate cuts are expected amid a housing crisis and economic stagnation in England, wrote Ashraf Laidi, chief currency strategist at CMC Markets US in New York, in a research note.
Higher interest rates can support a currency as investors transfer funds to where they can get better yields, while also helping to tamp down inflation. Cutting rates can weaken a currency while spurring economic growth.
"The euro zone is headed to recession," said Win Thin, currency strategist at Brown Brothers Harriman. "There's no way they're going to hike rates at this point."
Laidi sees an eventual easing of rates by the ECB.
The Federal Reserve, which has its next interest-rate meeting on Sept. 16, is expected to keep its key rate at 2%.
The dollar slipped to ¥107.04 from ¥108.23.
While unemployment data in the U.S. showed a big jump in people filing for jobless benefits and retail sales were sluggish, pulling theDow Jones industrial average down by more than 300 points in late trading, it wasn't enough to squash the dollar's rise.
"U.S. data, it's been decent," Win said. Dollar retrenchments since the euro's peak on July 15 have been "short and shallow," he said, as a rosier outlook for the U.S. in the long term takes hold.
The Labor Department said the number of people filing for unemployment insurance grew 15,000 to a seasonally adjusted 444,000. Economists had expected a drop in claims.
But the Institute for Supply Management, a private trade group, said its index of the nation's service sector rose to 50.6 in August from 49.2 in July. A reading of 50 suggests growth.
In other New York trading, the dollar rose to 1.0673 Canadian dollars from 1.0610 and climbed to 1.1088 Swiss francs from 1.1058 francs.
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