Dollar gains as investors rethink Fed rate stance

LONDON - The dollar gained ground on Monday, rebounding on concern that recent selling sparked by expectations the Federal Reserve could make a pause its two-year run of rate rises was overdone.

By (Reuters)

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Published: Mon 24 Jul 2006, 8:54 PM

Last updated: Sat 4 Apr 2015, 1:07 PM

Some analysts also cited relief buying of the US currency as euro zone government bonds fell after Israel said on Sunday it was prepared to back the deployment of a temporary international peacekeeping force in southern Lebanon.

The dollar slid last week after Fed Chairman Ben Bernanke said inflation would likely ease in coming quarters as growth slows, prompting market players to scale back the chance of another rate increase.

“The market is priced 50/50 for an August rate hike and it’s quite rare for the Fed to allow the market to have such a mixed view,” said Chris Turner, head of foreign exchange strategy at ING Financial Markets.

”Perhaps at the back of people’s minds the prospect of an August rate hike is back on the agenda,” he added.

By 1115 GMT, the euro had fallen 0.5 percent to $1.2623. The single currency was still up from a three-month low of $1.2456 hit last week.

Calyon senior currency strategist Daragh Maher said while Bernanke’s testimony was less upbeat than the market was priced for, it was still relatively balanced.

“The Chairman will have been pleased with the market reaction which saw rate expectations retrace to make the August outcome virtually a 50:50 call, a market standing which provides the Fed with the greatest degree of policy flexibility,” he said.

The dollar rose half a percent on the day to 116.63 yen but was still off a three-month peak of 117.88 yen hit on July 19. The euro was down 0.2 percent at 147.38 yen, but still near last week’s record high of 147.90 yen.

Middle east

Israeli soldiers battled Hizbollah fighters and warplanes pounded southern Lebanon on Monday. Israel said it would be willing to back a temporary international force to ensure Hizbollah is removed from the border and to take control of Lebanon’s border with Syria.

US Secretary of State Condoleezza Rice made an unannounced visit to bombed-out Beirut in a dramatic show of support for the the Lebanese government on a trip aimed at averting full-scale war across the region.

“Maybe there’s a slight glimmer of optimism in the Middle East and that could be a catalyst to tempt some of those who were bearish on the dollar last week,” Rabobank markets strategist Jeremy Stretch said.

Such hopes hurt the traditional safe-haven Swiss franc, which slid almost one percent against the dollar to 1.2469 francs and hit a 3-month low against the euro at 1.5752.

On the data front, investors will look to US numbers later in the week, including home sales and second quarter economic growth, for clues on whether the Fed will lift rates an 18th straight time next month.

No major US data is due on Monday.

Bernanke’s comments last week raised the likelihood among market players that the Fed might leave overnight rates steady at its policy meeting on Aug. 8.

The Fed has said its next move will depend on US economic data. This week’s slate includes consumer confidence, home sales and durable goods, and the growth figures on Friday.

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