Dollar Falls, to End 2007 on Down Note

The dollar fell versus a basket of major currencies on Monday, on track for its biggest annual decline in four years on expectations the Federal Reserve will have to lower interest rates further to stave off a recession.

In 2007, the dollar slid to record lows against the euro and 26-year lows against the British pound, largely because a severe tightening of credit markets dragged on economic growth.

A small rally that began in November was snuffed out in last week's thin trade, particularly after a report on Friday showed weaker-than-expected U.S. new home sales data. Futures markets reflect a 90 percent chance of a quarter-percentage-point Federal Reserve rate cut, to 4.0 percent, in January.

In total, dealers have priced in nearly 100 basis points of cuts over the next nine months, making the dollar a much-less-attractive bet for yield-hungry investors.

The New York Board of Trade's U.S. dollar index, a gauge of the dollar's performance against a basket of six major currencies, was down 0.3 percent at 76.010.

It is down more than 9 percent for all of 2007 -- on track for its biggest annual fall since 2003 -- though the index has fought back some from record lows hit in November.

Difficult lending conditions and more signs of slowing in the U.S. economy kept investors away from carry trades, in which they borrow at low rates in yen and Swiss francs to buy riskier, higher-yielding currencies.

Thin liquidity exaggerated market moves, with Japan and several European countries shut on Monday and all major financial centers on holiday on Tuesday.

Dollar Falls, to End 2007 on Down Note, Reuters
12/31/2007 7:21:29 AM