Dollar falls further as investors seek out higher interest rates

[G-khan]

G-khan: If they don't raise interest rates the dollar should continue its descent...

NEW YORK (AFP) - The dollar's downward spiral resumed, as investors fretted over low US interest rates and mounting current account as well as fiscal deficits in the United States.

The euro rose to 1.1290 dollars at 2100 GMT, from 1.1227 dollars late Friday in New York.

The dollar was being quoted at 118.60 yen from 118.98 on Friday.

Analysts said low interest rates in the United States are making it increasingly difficult to attract the massive amounts of capital needed for the deficits trade and capital flows as well as the budget deficit.

"The dollar is down across the board. ... It's a question of yield, and the US just doesn't have it," Marc Chandler, chief currency strategist at HSBC, said in London.

Analysts widely expect the US Federal Reserve to hold its key rates steady at a four-decade low of 1.25 percent on expectations that the US economy will soon show signs of recovery.

The euro reached a four-year peak of 1.1302 against the dollar, while the dollar got only a minor lift from a report on the service sector.

The Institute for Supply Management (ISM) said its overall index of non-manufacturing activity rose to 50.7 in April, from 47.9 in March. The rise in the index was stronger than expected.

"Sentiment on the dollar has not improved. The fairly positive ISM report had a minor impact, but only briefly, and after that it was all downwards," said Sean Callow, currency strategist at IDEAGlobal.

The pound was under pressure, given that the Bank of England -- which also meets this week -- is seen as likely to cut interest rates. A rate cut would diminish Britain's yield differential.

"Expect sterling to remain under pressure this week leading up to the BoE meeting. In the current environment, yield is really driving currency markets," said Daniel Katzive, currency strategist at UBS Warburg.

However, with most London financial markets closed for a holiday, dealers said trading was quiet before the workday started in New York.

The dollar was being quoted in late New York trade at 1.3421 Swiss francs, from 1.3355 Friday.

The pound was at 1.6063 dollars, after 1.6031 Friday.