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Dollar weakens as Fed statement looms

(Reuters) / 25 October 2006

NEW YORK - The dollar retreated on Wednesday, hurt by German data that raised expectations for a euro-zone interest rate increase and by uncertainty ahead of a Federal Reserve policy decision.

The Fed’s policy-making Federal Open Market Committee (FOMC) was widely expected to leave rates unchanged at 5.25 percent for the third consecutive meeting. But market participants were awaiting the statement on the meeting for clues on where rates are headed.

Traders came into the week anticipating a tougher anti-inflation statement from the central bank, but some analysts said the recent slew of  economic reports did not support that view.

“Recent  economic data do not seem to support the view that the Fed would be hawkish this afternoon,” said Boris Schlossberg, senior currency strategist at retail brokerage Forex Capital Markets in New York.

Schlossberg cited Tuesday’s Richmond Fed manufacturing survey and the Philadelphia Fed manufacturing report the week before, both of which came in much lower than expectations.

By contrast, Germany’s Ifo business sentiment index for October released earlier in the session beat economists’ consensus forecast -- and cemented the view that rates in the region would rise a quarter-point to 3.5 percent by year end.

Midmorning in New York, the euro was up 0.2 percent on the day at $1.2580. The dollar edged down 0.2 percent against the yen to 119.12 yen.

“Regardless of the wording of the FOMC statement, the cold, hard facts are against the dollar and on the side of the euro for the time being,” Schlossberg said. “Economic data support a much more aggressive rate hike in the euro zone than in the United States.”

A slightly weaker-than-expected September  existing home sales report hardly moved the market, but analysts said it could add a bit more pressure on the dollar going into the Fed’s meeting..

”A little bit weaker than expected on existing home sales, so expect to see some mild  dollar weakness ahead of the FOMC later this afternoon,” said George Davis, chief technical analyst at RBC Capital Markets in Toronto.

“But the overall mood is muted until we get the FOMC out of the way,” he added.

The Australian dollar climbed to $0.7619, its highest in seven weeks, after a central bank measure of inflation bolstered expectations for a quarter-point rise in interest rates to 6.25 percent as early as next month.

The data also helped the Aussie scale a 10-month peak against the Japanese currency of 90.89 yen.

Meanwhile, the market’s focus remained on the Fed. A run of solid  economic data earlier this month has laid to rest speculation the the central bank could lower rates in the near term, while Fed officials have said the inflation outlook remains unclear and price risks remain.

Fed officials in public remarks have been sending a consistent message that the risk of increasing inflation remain greater than the risk of a slowdown in economic growth, the bank Brown Brothers Harriman said in a note to clients.

“The Fed’s statement is ... likely to be quite similar to the last one, though an extra sentence or two expanding on its assessment of the economy should not be surprising,” the bank added.

The dollar was flat against the Swiss franc at 1.2657 francs, while the pound rose 0.2 percent to $1.8763.


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