By Beth Thomas
London, Aug. 6 (Bloomberg) -- The dollar gained, outpacing all the 17 major currencies tracked by Bloomberg, amid increasing expectations the Federal Reserve will lower the key interest rate in coming months to boost growth in the world's largest economy.
The dollar strengthened to 96.79 cents per euro at 10:39 a.m. in London, from 98.38 late yesterday. A two-week advance helped the U.S. currency rebound from a 2 1/2-year low of $1.02 to the euro on July 19. The dollar rose to 120.89 yen, from 119.35.
``The markets are assuming the Fed will cut and do what's necessary'' to boost growth and restore confidence, said Scott Barlass, who helps run 14 billion pounds ($22 billion) of funds at Abbey National Asset Managers in Glasgow. ``We bought some dollars back, and sold some yen'' in recent weeks.
Deutsche Bank Securities Inc. and Dresdner Kleinwort Wasserstein Securities LLC yesterday said the Fed will cut its benchmark lending rate this year, joining Goldman, Sachs & Co., which made that forecast on Friday. The target rate is at 1.75 percent, the lowest level in more than 40 years.
``In the current environment, there's more chance of the Fed cutting than there is of hiking,'' said Barlass, who sees the dollar gaining to 95.9 cents per euro this month. ``Renewed fears'' the U.S. economy may contract are fueling expectations of ``a stalling of activity globally as well.''
Different Mandates
``People know the U.S. economy is not doing great, but at least the Fed has the capacity to respond,'' said Michael Derks, a strategist at Commonwealth Bank of Australia in London. Also, ``European equities are still falling harder than U.S. equities. That accounts for part of the dollar's outperformance.''
The Dow Jones Stoxx 50 index, which advanced for the first day in six, is down more than 31 percent this year. In the U.S., the Dow Jones Industrial Average has shed almost 20 percent in 2002.
The European Central Bank is less inclined to trim interest rates than the Fed, investors and analysts said. The ECB's mandate is to keep inflation below 2 percent, whereas the Fed is also charged with fostering growth.
``I don't think, looking at the inflation environment, that these guys are going to change soon,'' said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA. ``If there is a rate cut to come, it could be the Fed.''
Consumer prices in the 12-nation region using the euro rose 1.9 percent in July from a year ago, only the second time the inflation rate has come in under the central bank's ceiling.
Focus on Growth
While a rate reduction by the Fed would increase the gap between benchmark lending rates in the U.S. and the 12 countries using the euro, investors are focusing more in the longer-term impact on growth and U.S. stock markets.
Expectations the Fed may lower rates is helping U.S. Treasuries, the best-performing global bonds so far this month, to outpace European bonds. The extra yields the two-year note gives over the equivalent German note increased to 1.46 percentage points, the most since October 1993.
The yen declined against the dollar as Japan's Nikkei 225 stock average dropped to a six-month low, after a survey of U.S. service companies yesterday signaled growth in Japan's largest export market is slowing.
``The dollar isn't tracking declines in U.S. stocks anymore, since the slump in U.S. equities is spreading to Japan and European markets,'' said Mitsuru Sahara, a vice president for foreign exchange at UFJ Bank Ltd. in Tokyo. ``The trend for now is to buy dollars for yen.''
In other markets, the dollar strengthened to $1.5424 to the British pound, from $1.5552, and 1.5019 Swiss francs, compared with 1.4776 late yesterday.