Dollar resumes upswing but lacks conviction

LONDON - The dollar rose back towards its 2008 highs on Wednesday as concern persisted about the economic outlook in Europe and Asia.

By (Reuters)

Published: Wed 20 Aug 2008, 7:26 PM

Last updated: Sun 5 Apr 2015, 11:55 AM

Profit-taking had been seen on Tuesday, when the dollar hit this year's high against a basket of currencies, but it gave way to a resumption of a broad upward momentum in the U.S. currency.

But there was little in the way of fresh market-moving news, economic data or policymakers' speeches behind the drift higher.

Some said it was more a result of short-term position adjustment than anything else and that it fitted in with the general dollar consolidation seen for much of this week.

"We are in search of a catalyst ... (and) we are entering more of a consolidation phase at the moment," said Michael Hart, European head of FX strategist at Citigroup in London, adding that Wednesday's moves were "position-driven".

"There's a perception emerging that this is as far as it will go at this stage," he said of the dollar's hefty 13-cent gain on the euro in little over a month.

At 1115 GMT the dollar index, a measure of the dollar's value against a basket of six major currencies, was up 0.4 percent on the day at 77.085.

On Tuesday, it rose to a high for the year of 77.413.

The euro was down 0.5 percent at $1.4715, almost a cent from its six-month low of $1.4628 hit on Tuesday.

The dollar gained a third of a percent on the yen to 110.05 yen, within sight of the seven-month high of 110.67 yen hit last week.

US not out of woods

Investors' views on the risks to both the U.S. and global economy appeared to be more balanced than they have been in recent weeks, when a sharp deterioration in the outlook for other countries gave the dollar a strong lift.

Interest rate expectations and differentials have shifted sharply in the dollar's favour, but in the absence of further pointers from data or policymakers, there was less scope for that move to continue.

For example, futures markets no longer expect the European Central Bank to raise rates this year, half a percentage point of UK rate cuts over the next six months are almost fully discounted, and more aggressive Reserve Bank of Australia easing is already factored in.

However, on the U.S. side of the ledger, the economic picture and banking sector may not be as rosy as some might have thought.

Data on Tuesday showed U.S. home building projects fell 11 percent last month to their lowest annual rate in more than 17 years and wholesale prices rose at the fastest annual rate in 27 years, highlighting the Federal Reserve's policy dilemma.

And concern persists that U.S. agencies Fannie Mae and Freddie Mac may need a government bailout.

"Investors are anxious about whether the major move (lately) represents lasting dollar strength or is just a major correction at a time when liquidity is poorest in July and August and moves are exaggerated," said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.

Meanwhile, a report from the Confederation of British Industry on Wednesday, which showed UK manufacturers expect to cut output at the fastest rate in nearly seven years, helped push sterling down 0.5 percent to $1.8575.

The Bank of England's minutes of its August monetary policy meeting came in line with expectations, with seven of the nine-strong Monetary Policy Committee voting to keep rates on hold at 5 percent, and one each voting for a cut and a hike.

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