U.S. nonfarm payrolls report will lead the market

The dollar fell versus the euro after a report showed U.S. mortgage delinquencies reached a record in the second quarter. The U.S. currency weakened against 15 of the 16 most- actively traded currencies as the data also showed sales of previously owned homes probably will fall this year to the lowest since 2002. European Central Bank President Jean-Claude Trichet said inflation risks still ``lie on the upside'' after the ECB and the Bank of England kept interest rates unchanged. ``The euro zone still looks strong, while there's nothing to get excited about in the U.S. economy,'' said Greg Salvaggio, vice president of capital markets at currency-trading company Tempus Consulting in Washington. ``That will weigh on the dollar.''

The dollar fell after the report showed the share of all U.S. mortgages entering foreclosure rose to 0.65 percent in the second quarter, an all-time high, from 0.58 percent in 2007's first three months. The percentage of sub prime borrowers making late payments rose to 14.82 percent from 13.77 percent, the Mortgage Bankers Association said. The weakness in the U.S. sub prime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.25 billion euros ($57.8 billion) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high.

``Financial-market volatility and reappraisal of risks over recent weeks have led to an increase in uncertainty,'' making it ``appropriate'' to gather more information before drawing conclusions, Trichet told reporters in Frankfurt today. The ECB cut forecasts for euro region growth to between 2.2 percent and 2.8 percent this year, from between 2.3 percent and 2.9 percent. The Organization for Economic Cooperation and Development yesterday cut its forecast for U.S. growth to 1.9 percent from 2.1 percent. Federal funds interest-rate futures show traders are betting, with 100 percent certainty, the Federal Reserve will lower rates to at least 5 percent on Sept. 18. The ECB has raised its benchmark rate eight times from 2 percent to 4 percent since November 2005 while the Fed has been on hold since June 2006.

``The Fed doesn't want to react to money market strains, unless it has seen evidence of a spillover into the economy, but we are starting to see those signs,'' said Nick Bennenbroek, head of currency research in New York at Wells Fargo & Co. Central banks worldwide are refraining from raising interest rates as they assess how the credit squeeze will affect economic growth.

The pound bought to $2.0237 after the Bank of England left its benchmark lending rate at 5.75 percent. The central bank has boosted borrowing costs five times since August 2006 to a six-year high. In a statement, the first that accompanied a no-change decision since 1999, the Bank of England said it's ``too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.'' It noted ``tentative signs'' that consumers were spending less.

Interest-rate futures show investors are still betting the ECB will lift borrowing costs by year-end, which will encourage so-called carry trades. The implied yield on the December futures contract was 4.51 percent today. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999. In a carry trade, the investor makes money by borrowing in a country with low interest rates, such as Japan, converting the money to a currency where interest rates are higher, such as the U.S. or euro countries, and lending the money at that higher rate. The profit comes from the spread between the borrowing and lending rates; the risk is that exchange rates may change. Japan's 0.5 percent target lending rate is the lowest among industrialized nations.

``The market still expects the ECB to hike rates one more time this year,'' said Michael Woolfolk, senior currency strategist at Bank of New York Mellon in New York, the world's largest custodian bank, with more than $20 trillion in assets under administration. ``The interest-rate differential still runs in favor of the euro against the dollar.'' The dollar pared losses after Fed Bank of Atlanta President Dennis Lockhart said he hasn't seen conclusive signs that the U.S. housing recession has harmed the wider economy and warned that inflation has yet to be contained. Fed Bank of St. Louis President William Poole said at a seminar organized by the European Economics and Financial Centre in London that the central bank will not be pushed into a decision by the financial markets.

Today U.S. nonfarm payrolls report will be important in determining if the Fed will cut rates, Salvaggio said. If job gains totaled less than 50,000 last month, that takes ``anything but a 50-basis-point cut off the table,'' he said. The median forecast among the economists surveyed is 110,000.