Forex

HONG KONG - The US dollar traded near a record low against the euro and fell to a new 12-year low versus the yen in afternoon Asian trade on Thursday as investors dumped the greenback on expectations of further interest rate cuts amid a bleak outlook for the world's biggest economy.

The dollar continued to fall even after President Bush was quoted in a radio interview that he preferred a strong currency to help deal with inflation and bring down record high oil prices.

'He (Bush) wants a strong dollar but he is not doing much to realize a strong currency. They need to show more to encourage people to buy the dollars. People are selling the dollar because of expectations of a further lowering of interest rates,' said Tomoko Fujii, head of economic strategy at Bank of America.

At 1.00 pm (0500 GMT), the euro was quoted at 1.5562 dollars, after earlier today soaring to 1.5585, the highest level since the common currency began trading in January 1999.

The dollar was trading at 100.20 yen, a level not seen since November 1995, according to traders.

The Fed will probably cut its key rates by 50 basis points on March 18, Fuji said. 'But there is always the risk it would be reduced by 75 basis points,' she said.

The dollar was also weighed down by uncertainties on the size of the rate cut the Federal Reserve is likely to implement next week, said Thomas Lam, senior treasury economist at United Overseas Bank.

'One of the uncertainties that appears to be pestering the market at this time is the eventual outcome of the Fed policy decision with regard to the target fed funds rate at next week's meeting -- specifically on the magnitude of the rate cut,' said Lam.

'It seems to me that the debate on Fed policy at this juncture is like trying to value abstract art. In light of the fluidity of the current situation, the decision to go with either a 50-basis-point or 75-basis-point reduction next week probably entails a high degree of subjectivity from policymakers.'

A weak dollar, while making it difficult for US policymakers to curb inflation, is helping the nation boost its exports, which should counter the slump in its housing and financial sectors, rising unemployment rates and declining consumer spending.

Since the subprime mortgage crisis erupted in August, the Fed has slashed its rates by a cumulative 225 basis points and has injected billions of dollars into the financial markets to help the ailing financial sector.

Bush has also announced a stimulus economic package that includes higher spending as well as tax cuts and incentives to lift the economy. This week, the Fed announced it would make available 200 billion dollars worth of credit lines for banks and would even accept mortgage-backed securities as collateral.

'The US has tried everything to keep the economy from weakening some more. But all of these seemed not to work. Now they need external help through a weaker dollar that will boost exports,' said Mark Wan, chief analyst at Hang Seng Investment Services Ltd.

Wan expects the dollar to fall to 1.60 against the euro 'very soon.'

As for dollar-yen, Bank of America's Fujii said the Japanese currency will likely rise further to 98 to the dollar at the end of the second quarter.

The euro was also well bid after the release of euro zone industrial output figures, showing production rising by 0.9 percent from December, for a 3.8 percent annual gain. The market had been expecting a monthly gain of 0.3 percent and an annual gain of 2.5 percent.

Comments Wednesday by European Central Bank council member Juergen Stark that inflation in the euro zone was a special concern and that the ECB's priority was keeping prices stable, provided a further catalyst to buy the single currency.

Later today, investors will be keeping an eye on the release of February retail sales data in the US to see if it would provide a further clue on whether the US is already in recession or not.

Hong Kong 1.00 pm (0500 GMT)

US dollar

yen 100.20

sfr 1.0107

Euro

usd 1.5562

stg 0.7666

yen 156.06

sfr 1.5727

Sterling

usd 2.0298

yen 203.55

sfr 2.0514

Australian dollar

usd 0.9349

stg 0.4605

yen 95.76