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Wednesday June 11, 2008 - 11:28:10 GMT
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FOREX NEWS-Dollar/yen rises on Fed, Stark weighs on euro

Wed Jun 11, 2008 6:58am EDT

* Dollar strikes 3-1/2 month high versus yen

* Hawkish talk from Fed officials support dollar

* ECB's Stark reins in extent of ECB rate cut expectations

By Naomi Tajitsu

LONDON June 11 (Reuters) - The dollar struck a 3-1/2-month high against the yen on Wednesday after more tough talk from Federal Reserve officials on inflation firmed expectations of a U.S. interest rate rise this year.

The euro momentarily hit a session low against the dollar after European Central Bank board member Jeurgen Stark was reported as saying the central bank is not considering a series of rate rises, even as investors expect a hike in July [nWEA9196].

Central banks in the past few weeks have cranked up their rhetoric about their rate outlooks, with the Fed apparently joining the ECB in saying it too will fight inflation pressures even as economic growth slows.

Analysts say the combination of surging prices and struggling economies is making it difficult for markets to gauge the rate outlook of central banks, adding that markets could be whipped around by officials' comments in the near term.

"Participants aren't sure how central banks are going to handle the situation where inflation pressures seem to be rising at the same time as growth prospects are slowing," said Philip Shaw, chief economist at Investec.

"Therefore markets are going to pay more attention to policymakers for guidance as to how monetary policy prospects are likely to pan out."

The euro traded 0.3 percent higher at $1.5505 <EUR=> by 0953 GMT, recovering from a slide to a session low of $1.5454 after Stark told Bloomberg News that the ECB will do everything necessary to anchor inflation expectations.


Stark's comments came after ECB President Jean-Claude Trichet surprised markets last week when he signalled that a rate increase could come as soon as next month to limit the inflationary impact on the economy from soaring oil prices.

Traders took Stark's comments to be softer in tone than those of Dallas Fed President Richard Fisher, who on Tuesday said the U.S. central bank would not allow inflation expectations to rise unchecked, echoing comments made by Fed Chairman Ben Bernanke a day earlier. [ID:nN10365737]

Such hawkishness pushed the dollar up to 107.75 yen <JPY=> on Reuters data, its highest level since late February

Bernanke had said the risk the U.S. economy has entered a substantial downturn has diminished over the past month, sparking the interest rate futures market to price in as much as 75 basis points of rate hikes by the end of the year FEDWATCH.

However, analysts cited the downgrade last week of the bond insurance arms of MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research) as evidence that problems in the U.S. economy are far from over [ID:nN05590179].

"The underlying evidence is not supporting (Bernanke's) case (on the economy), I think the market is pricing in too many rate hikes, and the dollar rally hasn't got anything to back it up," said Adam Myers, markets strategist at Credit Suisse.

Strong warnings about inflation risks from Fed officials came alongside an unexpected barrage of remarks from the U.S. Treasury, which has said it is keeping an eye on the dollar and keeping options open for dollar-buying intervention to stem its slide.

Some analysts said they were surprised by the slew of comments from financial officials in the run-up to the Group of Eight finance ministers meeting later in the week, adding they would be watching to see if currencies will be discussed at the gathering.

Japan's Ministry of Finance said currencies may make it on to the agenda when the nation hosts the meeting later this week, while adding it the issue was unlikely to be included in the final communique [nT346837] (Additional reporting by Simon Falush; Editing by Malcolm Whittaker)

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