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Dollar mostly up on rate decisions; eyes on Trichet

LONDON - The dollar mostly strengthened on Thursday, hitting a 2-1/2 month high versus the low-yielding yen following the Federal Reserve’s decision the previous session to keep rates on hold at 5.25 percent.

The euro held steady after the European Central Bank kept rates on hold at 3.75 percent on Thursday as markets expected, while sterling pared some of its earlier losses after the Bank of England raised rates to 5.5 percent, also as forecast.

The dollar’s general strength followed the Fed’s statement that inflation remains the bank’s main concern despite recent signs of economic weakness, prompting some investors to pare back bets on the Fed cutting rates this year.

“The statement from the FOMC fed through into the psyche of European investors,” said Kamal Sharma, currency strategist at Bank of America.

”The market was expecting a dovish comment but the statement suggests that the Fed is still concerned about inflationary pressures which has scaled back views on rate cuts later in the year,” he added.

Meanwhile, all eyes are on ECB President Jean-Claude Trichet’s press conference at 1230 GMT to see whether he signals a rate hike in June, as investors are widely expecting.

At 1200 GMT the dollar was up a touch at 120.35 yen, having hit 120.49 yen earlier, its highest level since Feb. 27.

The euro was also up a third of a percent against the yen at 162.90 yen, within a yen of its lifetime peak set last week.

The euro was flat against the dollar, however, at $1.3530, down a cent and a half off its record high above $1.3680 in April.

The dollar index, which measures the dollar’s strength against a basket of major currencies, hit its highest level since April 17.

European rates in focus

The yen has fallen most in value versus the dollar among the major currencies.

Jeremy Stretch, currency strategist at Rabobank said increased appetite for risk has led investors back into the carry trade where they borrow low-yielding currencies like the yen to fund purchases of higher yielding currencies.

“The Dow reached an all-time high last night indicating a return to risk appetite,” Stretch said.

”Yen crosses have been hit. (The yen) is the whipping boy of weak currencies at the moment.”

Sterling was down 0.3 percent at $1.9890 after data showed that the UK trade deficit in March widened to more than 7 billion pounds, its largest in 10 months.

The BoE’s rate hike helped pare some of the pound’s earlier losses, but investors’ attention is now switching to the ECB’s Trichet.

“At a time when GDP growth continues to surprise to the upside and inflation risks are also still clearly tilted to the upside, further rate rises above the 4 percent mark cannot be totally ruled out,” said Audrey Childe-Freeman in a client note.

“But anybody hoping for the ECB to pre-commit that far out today may be disappointed.”

On the US calendar, trade figures for March are due later on Thursday, as well as speeches from Chicago Fed President Michael Moskow and Fed board governor Randall Kroszner.