Forex - Dollar off day lows but caution prevails ahead of Fed rate verdict

LONDON, Jan. 30, 2008 The dollar was off day lows amid early indications that the key US jobs report Friday may come in stronger than expected although caution ahead of the Fed's rate verdict later this evening kept the currency from rising too far.

According to payroll services firm ADP (NYSE:ADP) , the US economy added a surprisingly large 130,000 private sector jobs in January, suggesting that the official non-farm payroll figure may exceed the 58,000 expected. In December, it stood at 18,000.

'Indeed, following the ADP report, the risks to our own call now lie on the upside - we could easily see a 100,000 plus figure,' said Paul Ashworth at Capital Economics.

The news helped the dollar edge higher, having struggled in the 1.48 region against the euro earlier.

On the other hand, US GDP data which also came out around the same time, was decidedly weak. The first estimate of fourth quarter GDP came in at an annualised 0.6 pct, only half of consensus expectations of 1.2 pct and well down from the final estimate of 4.9 pct in the third quarter.

'The dollar showed a modestly negative reaction to the GDP report, but was overshadowed by the upside surprise in ADP employment,' said Michael Woolfolk at Bank of New York Mellon.

But that aside all eyes are on the Fed's rate verdict due at 7.15 pm GMT today.

Financial markets have priced in a large probability of the Fed delivering a half point reduction to take the Fed fund rate down to 3.00 pct from the current 3.50 pct, although this prospect has been slightly dented since the rally on equity markets this week, after some decent US data.

'When taken in consideration with the upwards surprises to durable goods, consumer confidence and ADP employment, the GDP report argues for a 25 basis point rate cut from the Fed this afternoon,' added Woolfolk at Bank of New York Mellon.

The Fed last week surprised markets by lowering its base rate by 75 basis points to 3.50 pct.

'As is usual, ahead of the Fed meeting, some doubts have started to creep in about exactly what the Fed will deliver,' said Paul Mortimer-Lee, head of market economics at BNP Paribas. (OOTC:BPRBF)

'While markets judge 50 basis points remains the most likely case, a number of commentators have noticed the rally in stocks ... this has led them to conclude that maybe 25 basis points is all the Fed need deliver,' said Mortimer-Lee.

Elsewhere, the pound weakened against the euro after Bank of England data revealed UK housing market activity remains weak, which will add to the pressure on the central bank to cut interest rates next week.

The BoE said mortgage approvals -- a good indicator of future housing demand -- fell to 73,000 in December, their lowest level since records began, down on November's 81,000 and well below expectations for 80,000.

'Today's data adds on to the series of weak UK economic releases of the past few weeks, reinforcing the case for a BoE rate cut next week,' said CIBC World Markets' Childe-Freeman.

Elsewhere in the release, the central bank found that net consumer credit during December was only 0.6 bln stg, down on November's 1.2 bln and the rolling 6-month average, also 1.2 bln.

The pound strengthened against the dollar though, supported not only by expectations that US interest rates will fall further and quicker than in the UK, but by the reappointment of Mervyn King as Bank of England governor, and Andrew Sentance as a Monetary Policy Committee member. Both are considered to be hawkish members of the rate setting MPC.

'Mervyn King's reappointment as Governor of the Bank of England for another five years is possibly a slightly hawkish development for the outlook for interest rates,' said Jonathon Loynes, chief European economist at Capital Economics.