Vivianne Rodrigues
Reuters
Monday, December 4, 2006

NEW YORK (Reuters) - The dollar rebounded on Monday from a 20-month low against the euro and a basket of currencies as investors saw a recent 3-percent fall in the currency's value as overdone.

"We are seeing a bounce in the dollar this morning after the sharp sell-off last week," said Brian Taylor, chief currency trader at Manufacturers and Traders Bank in Buffalo, New York. "Some investors are thinking that perhaps we went too far, too fast with the buck and now we are seeing buying on the currency."

By early morning in New York, the dollar rose 0.19 percent to $1.3307, off an earlier 20-month low of $1.3367 (EUR=). It is now within a few cents of its 2004 record peak of $1.3667.

The euro hit a record high above 154.10 yen (EURJPY=) before falling back to 153.78. The dollar was steady at 115.57 (JPY=) after hitting a four-month low below 115 on Friday.

Demand for the dollar had declined after weak U.S. economic data boosted expectations the Federal Reserve might need to cut interest rates next year to help the slowing economy. On Friday, a report showed U.S. manufacturing contracted in November for the first time in 3-1/2 years.

On Monday, Chicago Fed President Michael Moskow told CNBC.com he expects U.S. economic growth to be below trend, and that expectations for inflation have been contained.

Expectations for a European Central Bank rate hike this week and perhaps again in early 2007 boosted the euro on Monday to within three cents of its record high against the dollar and to a record peak against the yen.

Sterling was off last week's 14-year high against the dollar, trading at $1.9751 (GBP=). The dollar slid to its lowest since March 2005 against a basket of currencies (=USD).

In line with recent upbeat data from the euro zone, the Sentix index on Monday showed that investor sentiment improved in early December, with the current situation judged to be at its best since the survey began in February 2003.

Although French ministers have called for vigilance over the euro's rise, they have not been joined by counterparts from other euro zone states or by central bankers, prompting investors to conclude that $1.40 rather than $1.30 was now the key level that would make officials uncomfortable.

The European Central Bank is expected to raise rates to 3.5 percent this week. Some predict further tightening of monetary policy, although a recent surge in the euro has slightly dampened this view.

The only U.S. economic indicator in sight on Monday is the pending home sales index for October at 10 a.m. EDT.

(Additional reporting by Toni Vorobyova in London)