7 August 2006, 13:54   The dollar held near a two-month low against a basket of currencies on Monday

The dollar held near a two-month low against a basket of currencies on Monday after data showing lacklustre U.S. job growth hardened expectations that the Federal Reserve would not raise interest rates this week. U.S. non-farm payrolls grew less than expected in July, prompting more investors to conclude the Fed would keep rates at 5.25 percent on Tuesday after 17 straight increases. Friday's data sent the dollar sharply lower at the end of a week which saw a widely expected rate hike from the European Central Bank and a surprise rise from the Bank of England. But given the scale of the dollar sell-off, there could be some room for the U.S. currency to tick up a bit going into the Fed meeting as investors readjust positions. "Tomorrow the Fed is going to leave rates unchanged, that is the market view, but there is still a 20 percent probability priced in the futures that there might be a hike," said Hans-Guenter Redeker, chief FX strategist at BNP Paribas. "We have seen after the payrolls that some more aggressive euro long positions have been built up. That means those positions might be due to be taken profit on." By 0744 GMT, the euro was steady at $1.2873 after surging to a two-month high of around $1.2909 on Friday. The dollar index held at 84.67 , near a two-month low of 84.39 hit on Friday. Sterling flirted with the 15-month high of around $1.9130 marked on Friday, trading at $1.9060 . The pound also held near last week's eight-year highs against the yen . The dollar was up 0.2 percent at 114.66 yen , while the euro firmed to 147.48 yen . The Bank of Japan also meets to decide on rates this week, but few expect it to follow up last month's rate rise to 0.25 percent with another move until later in the year. Yen weakness is "driven by interest rate differentials," said BNP's Redeker. "For us it is just a question of time when the yen is going to strengthen considerably, but the market perhaps is not ripe for that yet," he said. The outlook for more credit tightening by the European Central Bank was reinforced by comments from policymakers. ECB Executive Board member Lorenzo Bini Smaghi told Italian newspaper Il Sole 24 Ore that euro zone rates were still "very accommodating" even after a rise to 3.0 percent last week and the process of adjusting policy would continue

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