Dollar at 1-week high vs euro, eyeing Fed rates

LONDON - The dollar rose to a one-week high against the euro on Thursday but stayed in recent ranges as investors, wondering how high US interest rates will climb, looked ahead to next week’s Federal Reserve meeting.

By (Reuters)

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Published: Thu 23 Mar 2006, 9:33 PM

Last updated: Sat 4 Apr 2015, 3:37 PM

The dollar has bounced back against other major currencies in recent sessions as investors took upbeat comments on the economy and housing market from Fed Chairman Ben Bernanke as a sign that rates could rise beyond an expected hike on March 28.

Bernanke said on Monday the economy should keep growing at a brisk pace even if the housing market slowed.

“Bernanke definitely left the door open (for more rate hikes) so that is supporting the dollar and also making people unwilling to maintain long euro/dollar positions ahead of next week,” said Niels Christensen, senior currency strategist at Societe Generale in Paris.

The greenback fell sharply last week to a two-month low versus the euro after soft inflation data suggested the Fed may be close to ending its tightening campaign.

Christensen said there was some unwinding of positions from investors who had expected the dollar to extend last week’s slump, past $1.22 per euro, and had been disappointed by the recent currency movements.

By 1215 GMT, the euro was down around 0.2 per cent on the day and one per cent on the week at $1.2056, close to a one-week low of $1.2049 hit earlier in the session.

The dollar was also a touch firmer against the yen at 117.04 yen.

Strategists said the yen was also weakened by comments from two US senators visiting Beijing, who took a less aggressive tone in calling for China to loosen currency controls than some had expected.

“Dollar/yen is slightly higher, perhaps as a consequence of that, with some of the comments sounding a little bit more hopeful in the sense of them not pushing on the anti-China trade legislation that they’ve brought to Congress,” said Steve Barrow, currency strategist at Bear Stearns. “But we’ll have to see what happens when they get back (to the US).”

The two senators authored a bill that threatens a 27.5 per cent tariff on Chinese exports to the United States unless Beijing lets the yuan rise significantly against the dollar.

On Thursday they said such legislation was not the only way forward but said there was need for “concrete signs of movement” from China.

The yen was also pressured after Bank of Japan Policy Board member Shin Nakahara said caution was needed over the risk of deflation returning in Japan, and that the economy still needed very easy monetary conditions. However, he is seen as one of the most dovish BOJ members.

Rate debate

The top three major currencies have been locked in familiar trading ranges so far in 2006, with central banks in the United States, Japan and the euro zone all expected to raise interest rates to some degree this year.

The Fed is widely seen lifting rates to 4.75 per cent from 4.5 on Tuesday, but the big question is whether the central bank will raise rates to 5 per cent or higher at meetings in May and June.

Investors will scour data on US home sales, given that a cooling of the once red-hot housing market could slow the US economy and accelerate an end to the Fed’s tightening policy.

In the United States, sales of existing homes are due at 1500 GMT and are forecast to ease to a 6.5 million annual pace in February from 6.56 million the previous month. That would be the slowest pace in nearly two years.

In the euro zone, investors will listen for clues on euro zone interest rates from European Central Bank President Jean-Claude Trichet, who is due to speak twice on Thursday.

The market expects the ECB to raise rates from 2.5 per cent in June and some analysts expect a tightening as soon as May.

Elsewhere, the New Zealand dollar rebounded from 21-month lows after data showed the country’s current account deficit came in at NZ$3.38 billion in the fourth quarter, less than forecast.

The kiwi rose as high as $0.6293, pulling away from a 21-month low of $0.6174 struck the previous session.

The currency has tumbled about 8 per cent this year on mounting worries that an economic slowdown will prompt the Reserve Bank of New Zealand to cut rates later this year from 7.25 per cent , the highest in the developed world.

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