(Updates prices, adds comment, byline)
By Steven C. Johnson
NEW YORK, May 5 (Reuters) - The dollar fell on Monday for
the first time in three sessions as oil prices hit a record
high, sparking debate about the strength of the U.S. economy.
The U.S. services sector grew in April for the first time
in four months, according to a report on Monday. But that news
was overshadowed by a Federal Reserve survey showing the
banking sector remained in the grips of a credit crunch.
Last week, the dollar rose after a report showed the
economy shed 20,000 jobs in April. Though it was the fourth
straight monthly decline, employers cut far fewer jobs than
market watchers had expected, prompting a bit of cautious
optimism.
After trimming interest rates to 2 percent last week, the
Federal Reserve hinted it may move to the sidelines and pause
its aggressive seven-month easing campaign that has reduced the
dollar's appeal to global investors.
But while data shows the U.S. economy continued to eke out
modest growth in the first three months of 2008, investors
remain wary of declaring a sustained dollar recovery with oil
at a fresh record high above $120 a barrel <CLc1> and more
corporate fallout expected from the credit crunch.
"It is premature to say (the U.S. economy) definitely won't
fall into a recession," said Ashraf Laidi, chief currency
analyst at CMC Markets in New York. "You must remember, we have
seen four consecutive months of declines in payrolls."
In a note to clients on Monday, Scotia Capital senior
currency strategist Camilla Sutton warned of "ongoing downside
risk to the U.S. economy," adding "the housing market has yet
to bottom, consumer confidence is at multi-decade lows,
employment growth has evaporated and high commodity prices are
only exacerbating an already weak economic backdrop."
Against a basket of six major currencies, the dollar was
down 0.3 percent at 73.220 <.DXY>. The greenback also fell 0.5
percent to 104.80 yen <JPY=> as doubts about the U.S. outlook
dulled investor risk appetite. Trading volume was lighter than
usual with London and Tokyo closed for public holidays.
The euro rose 0.4 percent to $1.5489 <EUR=>, shrugging off
earlier data showing euro zone investor morale had unexpectedly
weakened in May.
Investors were far more concerned with the expected
trajectory of European Central Bank interest rate policy.
With food and energy costs on the rise, ECB President
Jean-Claude Trichet warned again on Monday of "significant"
inflation risks, suggesting benchmark rates would likely stay
fixed at 4 percent when the central bank meets on Thursday.
Consumer prices in the euro zone rose by 3.3 percent in the
12 months to April, below the prior month's reading but still
well above the ECB's target of about 2 percent.
"Trichet has been consistent in telling the market he has
but one needle in his compass, and so long as the data
continues to suggest inflation pressures, he'll remain
hawkish," said Michael Woolfolk, senior currency strategist at
The Bank of New York Mellon in New York.
The single currency, though, is still well below its
$1.6018 record high set last month, and Woolfolk said Trichet
would "probably have to come out and sound the warning bells
for a rate hike" before it retests that level.
The dollar briefly pared losses after data on Monday showed
the U.S. services sector grew unexpectedly in April, easing
some concerns about the economy, but the positive momentum
proved fleeting in the currency market. For more, see
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The services sector represents about 80 percent of U.S.
economic activity, including businesses such as banks,
airlines, hotels and restaurants.
"The question is, 'Will we stay in expansionary
territory?," said CMC Markets' Laidi. "We have nearly two
months until the next Fed meeting, so a lot could happen."
The Fed next meets on June 24-25 and federal funds futures
contracts were on Monday pricing in just a 12 percent chance of
another quarter-percentage point rate cut to 1.75 percent.
The Fed began cutting benchmark rates in mid-September,
when they stood at 5.25 percent.
Also weighing on the dollar was news that Microsoft Corp
<MSFT.O> dropped its bid for Yahoo Inc <YHOO.O>, clouding the
mergers and acquisitions outlook.
(Additional reporting by Nick Olivari, Editing by Gary
Crosse)
