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NEW YORK: The US dollar fell below the 1.4000 level to the euro on Tuesday as the market worried about the prospect of an early interest rate hike even as the economy continues to be gripped by recession.
The euro rose to 1.4063 dollars at 2100 GMT in New York trading from 1.3893 a day earlier.
The dollar also fell against the Japanese currency, to 97.41 yen from 98.50.
Speculation about a potential US rate hike erupted last Friday when unemployment data emerged mostly better than expected.
Higher bond yields are also putting pressure on federal fund rates that have been virtually at zero levels aimed at jolting the world's largest economy from prolonged recession.
"The controversy over future US interest rates still rages as some continue to point to the better than expected US employment data," PNC Bank analysts said in a note.
They reminded that unemployment numbers were a lagging indicator and "it is doubtful that the Fed will choose to tighten on this data."
Goldman Sachs on Tuesday advised clients to buy the euro versus the dollar as risk aversion eased and prices of commodities rebound.
The bank recommended taking a long position in the euro against the greenback "with a stop on a close below 1.3720 for an initial target of 1.45."
But Boris Schlossberg, director of currency research at Global Forex Trading, questioned the Goldman forecast.
"We remain skeptical of the long euro positions at this time believing that the salad days of the recovery trade may be behind us.
"It is difficult to imagine that growth projections for the second half of 2009 will be realised in the face of lacklustre final demand. Therefore the recovery trade could soon run out of steam," he said.
Schlossberg acknowledged that consumer sentiment had improved but "we do not believe that the change in sentiment will translate into a marked uptick in spending."
The dollar had rebounded Friday after the US Labour Department said the number of job losses slowed to 345,000 from 539,000 in April, although the jobless rate surged to 9.4 percent in May.
As bond yields rise amid the economic crisis and growing debt, British bank Barclays Capital said in a research note that investors would be focusing on US Treasury bond auctions this week.
"If there is concern about long-term US fiscal policy, the reception of the ... auctions should be poor and the US dollar will suffer," the analysts said.
"In US dollar terms, these auctions could be viewed as referenda on how credible US growth and the government's commitment to pulling back fiscal stimulus are viewed," they added.
In late New York trade, the dollar fell to 1.0783 Swiss francs from 1.0916 on Monday.
The pound firmed to 1.6306 dollars from 1.6050. - AFP/de
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