The dollar advanced to a new one-year high against the euro on Thursday as the market’s focus reverted to sluggish economic prospects outside the United States and away from concerns about the U.S. financial system.

Analysts said U.S. investors were liquidating positions in overseas assets and repatriating money home, buoying the dollar.

The health of U.S. financial institutions is still a concern, but falling oil prices and a bounce on Wall Street have neutralised such worries for now.

“The market’s direction points toward dollar buying,” said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Bank.

“What we are witnessing now is position adjustments that are part of a bigger picture, one in which investors are pulling back money from risk assets,” Inoue said.

The euro was down 0.2 percent at $1.3970 after touching a new one-year low of $1.3933.

Euro zone economic growth will halve in 2008 from 2007 and inflation will be much higher because of financial turmoil, soaring commodity prices and housing market shocks, the European Commission said on Wednesday. It slashed its gross domestic product growth prediction for the euro zone to 1.3 percent from the 1.7 percent predicted in April.

The shift in the market’s focus toward weakening growth outside of the United States enabled the greenback to brush aside news on Wednesday that Lehman Brothers posted third-quarter losses and failed to announce concrete plans to raise capital.

Prior to the results release by Lehman, the dollar retreated against the yen on fears that bad news from the Wall Street bank could worsen concerns about the U.S. financial sector.

On Thursday, the dollar slipped 0.2 percent to 107.50 yen <JPY=> but was off the low of 106.58 yen brushed the previous day.

The New Zealand dollar plummeted to a near two-year low of $0.6513 on Thursday after the Reserve Bank of New Zealand cut interest rates by a more-than-expected 50 basis points to 7.5 percent, the second consecutive reduction. [ID:nWEL000746] The kiwi later pulled back to $0.6526.

RBNZ Governor Alan Bollard said New Zealand’s economy is in a shallow recession but should return to growth by the end of the year.

The Australian dollar spiked briefly against the U.S. dollar and the yen on Thursday on stronger-than-expected Australian employment data but the rally was short-lived.

Australian employment rose by 14,600 in August, much higher than the 5,000 forecast. The country’s jobless rate also dipped to 4.1 percent from 4.3 percent in July..

“The Australian economy is unlikely to turn around on this data alone,” said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland.

“Some short-covering emerged in a knee-jerk reaction to the upbeat headline numbers, but such moves are unlikely to derail the currency’s downtrend,” Yamamoto said.

The Aussie, which fell to a 13-month low of $0.7954 earlier in the day, jumped to an intraday high of $0.8020 after the data but pulled back to $0.8005.

Traders said many funds and financial institutions were facing a liquidity problem caused by credit jitters, forcing them to close positions in order to secure cash.

The trend favours the dollar and yen while being negative for the euro, emerging currencies and high yielders like the Aussie, traders said.

The Aussie gained 0.2 percent to 86.00 yen but was off the intraday high of 86.54 yen hit on the employment data.

Source: http://www.afxnews.com

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