Dollar drifts higher, market looks for direction
SINGAPORE, Nov 23 - The dollar extended its decline in Asian trading on Wednesday after minutes from the U.S. Federal Reserve’s Nov. 1 meeting indicated that the Fed could be close to ending its policy-tightening cycle.
The dollar had slipped in late New York trading on Tuesday after traders read the minutes to mean that some policy makers were less worried about inflation than about a continued rise in the benchmark interest rate.
But Richmond Federal Reserve President Jeffrey Lacker doused some of the speculation. Lacker, who will become a voting member of the Fed’s rate-setting committee next year, told Reuters it was too soon to declare the Fed’s rate increases over, stressing that inflation remained a risk amid solid growth.
At 0620 GMT, the euro traded at $1.1842, compared with $1.1815 in late New York trading. The dollar was at 118.55 yen, dipping from 118.73.
“There’s very little doubt going into next year that the end of the Fed’s tightening will weigh on the dollar,” said Uwe Parpart, a strategist at Bank of America in Hong Kong. “The question is when will this become significant.”
“These are mixed signals,” he said, referring to the Fed’s “dovish” minutes on the one hand and “hawkish” comments on the other from Lacker and Chicago Fed President Michael Moskow, who spoke earlier this week.
The Fed has raised its benchmark rate 12 times in the past 18 months to 4.0 percent, making dollar deposits increasingly attractive to international investors. The rate increases have contributed to the dollar’s 16 percent surge against the yen and 15 percent rise against the euro this year.
Trading in Asia was subdued as Japanese markets were closed for a holiday and U.S. markets were likely to slow down ahead of Thanksgiving on Thursday.
EUROPEAN RATE RISE
Greg Gibbs, senior currency strategist at Royal Bank of Canada in Sydney, said economic fundamentals favoured the euro in coming weeks, as U.S. data showed areas of weakness while the European Central Bank was preparing to raise interest rates for the first time in five years. Moreover, dollar repatriation by U.S. companies taking advantage of a one-off tax break would ebb in coming weeks, removing one more prop from the U.S. currency, he said.
“I think the euro will continue to strengthen in the next couple of months,” Gibbs said. “The euro will trade at 1.20 again. Thereafter we could see a stronger dollar.”
The euro last traded at $1.20 on Nov. 3.
But Parpart at Bank of America sees the rate differential between the U.S. and Europe growing because the Fed will not only match an ECB rate rise expected next week but will continue to raise rates for a while longer while the ECB stays put.
Robert Rennie, chief currency strategist at Westpac in Sydney, also said the euro’s rebound could be temporary.
“To us the euro’s still a sell. It’s just a question of whether to wait for 1.1880 or 1.2000, and we think the former.”
Some analysts said the Fed’s minutes marked a change for the U.S. central bank, which has been tightening almost on autopilot.
There were also signs the Fed might soon drop or replace its line that policy would be tightened at a “measured” pace.
“The case for a pause has been building for a while and the minutes add some weight to that view,” said Rory Robertson, an interest rate strategist at Macquarie Bank.
He thought the Fed could tighten once or perhaps twice more, depending in part on whether the next couple of payroll reports showed any improvement in hiring. Currency bid prices at 0604GMT. All data taken from Reuters with percent change calculated from the daily U.S. close at 2130GMT.
Written by admin on November 23rd, 2005 with
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