Tuesday January 29, 2008 - 21:20:48 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar creeps higher as all eyes turn to Fed
(Updates prices, adds quote)
By Steven C. Johnson
NEW YORK, Jan 29 (Reuters) - The dollar edged up against
the euro and yen on Tuesday after mixed U.S. economic data
prompted traders to trim bets against the greenback ahead of
this week's interest rate decision by the Federal Reserve.
Financial markets expect the central bank to reduce
benchmark lending rates on Wednesday, though
better-than-expected data on consumer confidence and durable
goods orders helped cut through some of the gloom surrounding
the U.S. economic outlook.
Separate data showed more U.S. housing sector trouble, but
that familiar story was absorbed easily by the market.
"Traders have become far more realistic, realizing the
world has not come to an end, and stocks have stabilized," said
Kathy Lien, chief strategist at DailyFX.com in New York.
By late afternoon, short-term interest rate futures
reflected about a 78 percent chance of a 50-basis-point Fed
rate cut, from 86 percent on Monday. The number had slipped as
low as 60 percent after Tuesday's data.
"The Fed will probably cut by 50 basis points, though I
think there's a greater chance of a 25-basis-point cut than
people realize with Congress' plans for fiscal stimulus giving
the stock market an important extra nudge higher," said Ashraf
Laidi, chief market analyst at CMC Markets in New York.
The euro slipped to $1.4772 <EUR=>, down 0.1 percent from
late Monday. Before Tuesday, the dollar had fallen against the
euro in four of the last five trading sessions after the Fed
startled markets by slashing benchmark rates by 75 basis points
to 3.5 percent in an emergency move last week.
The dollar rose 0.2 percent to 107.05 yen <JPY=>, near a
session peak of 107.23 yen hit after the durables data.
50 OR BUST?
If the Fed cuts rates by 50 basis points after its meeting,
that would bring the federal funds rate down to 3 percent, a
full percentage point below the euro zone benchmark rate and
among the lowest in the industrialized world.
A lower yield would presumably make the dollar a less
attractive currency in which to hold investments.
If the Fed cuts by 50 basis points, the cumulative 125
basis points of easing would be the biggest move in a two-week
span since the U.S. central bank began using the federal funds
rate as its primary policy tool in the early 1990s.
If such a cut is accompanied by more relatively positive
U.S. economic data, investors may stampede back into the market
hunting for higher-yielding, higher-risk investments, said Mark
Frey, head trader with Custom House, a currency services firm
in Victoria, British Columbia.
"The carry trade will be back in vogue and the U.S. dollar
will likely struggle, especially against the euro and the
commodity currencies," Frey said. In carry trades, investors
borrow in low-yielding currencies such as the yen in order to
make investments in currencies bearing higher rates.
The high-yielding Australian dollar would be one of the
biggest beneficiaries, CMC Markets' Laidi said, and could rise
to US$0.90 <AUD=>. It last traded up 0.1 percent at US$0.8891.
Dealers and investors would like to see what the Fed, in
the statement accompanying its policy decision, has to say
about the risks ahead for economic growth -- especially with
fourth-quarter U.S. gross domestic product data and the January
employment report due later this week.
(Additional reporting by Kevin Plumberg and Lucia Mutikani;
Editing by Jonathan Oatis)
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