FOREX-Dollar hits 14-month low vs euro as U.S. economy contracts

Wed Jan 30, 2013 7:58pm IST

* Euro rises above resistance at $1.35, highest since Nov. 2011

* U.S. economy unexpectedly contracts in 4th quarter; Fed statement next

* Yen slide resumes, more losses in store

By Wanfeng Zhou

NEW YORK, Jan 30 (Reuters) - The dollar fell to a 14-month low against the euro on Wednesday after data showed the U.S. economy unexpectedly contracted in the fourth quarter, in contrast to an improving economic outlook in the euro zone.

U.S. gross domestic product fell at a 0.1 percent annual rate, the Commerce Department said, suffering its first decline since the 2007-09 recession and denting hopes the Federal Reserve may end its bond-buying stimulus measure sooner rather than later.

"It's an awful number. This dashes hopes among investors that the Federal Reserve will move away from an ultra-easy monetary policy," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"This is a source of weakness for the dollar because it takes away the narrative that the U.S. economy is performing better than the rest of the world."

The Fed concludes its two-day meeting later in the day. While the central bank is expected to keep monetary policy on a steady path, intensive debates continue behind the scenes over when the controversial bond-buying program should be curtailed.

The euro rose as high as $1.3558 after the GDP data, near a session peak of $1.3563 hit earlier in the global session, the strongest level since November, 2011, according to Reuters data. It was last up 0.4 percent at $1.3549.

The euro picked up momentum after it broke above an option barrier and psychologically important level at $1.3500, with traders citing sustained demand from model and macro funds.

Analysts said the recent trend of euro strength could be maintained, after data showed euro zone economic sentiment rising for the third month in a row and comments from European Central Bank policymaker Ewald Nowotny that the recovery was seeping into the real economy.

A separate report showed U.S. private employers added 192,000 jobs in January, more than economists were expecting, in a sign of growth in the labor market. The data comes two days ahead of the all-important government nonfarm payrolls report.

The dollar briefly trimmed gains versus the yen after the GDP data before recovering. It was last at 91.15 yen, up 0.5 percent on the day, having risen to a 2-1/2 high at 91.40 yen on Reuters data. Traders reported an option barrier at 91.50 yen which could cap gains in the near term.

Selling the yen has been mostly a one-way bet since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the BOJ into more aggressive monetary easing to beat deflation.

"We have a forecast of 95 yen for this quarter but even that could be exceeded given the pace of the current moves," said Ian Stannard, head of European FX strategy at Morgan Stanley.

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