Friday June 13, 2008 - 23:52:28 GMT
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Reuters - www.reuters.com
FOREX NEWS - Dollar caps best week since 05 as inflation looms
By Steven C. Johnson
NEW YORK (Reuters) - The dollar jumped against the euro on Friday
and notched up its best week against a basket of currencies since 2005
as mounting inflation fears had investors bracing for Federal Reserve
interest rate hikes this year.
The euro also softened after Irish voters rejected a treaty
promoting closer European Union unity, putting wide-ranging
institutional reform plans at risk and sending the euro to a one-month
low at $1.5304. It clawed back to $1.5360 in late trade, still down 0.6
percent on the day.
The single currency ended the week 2.7 percent weaker against the
dollar, its biggest weekly slide since January 2005, while the dollar
index .DXY, a gauge of the greenback against six major currencies, also
had its best week in more than three years.
The main driver for the dollar has been inflation. Surging energy
costs have sparked tough talk from Treasury and Fed officials in recent
weeks, including Chairman Ben Bernanke, who said a weak dollar was
contributing to import price inflation.
"Policy makers are more focused on inflation than growth at the
moment, and that is dollar supportive," said Shaun Osborne, chief
currency strategist at TD Securities in Toronto.
On Friday, a government report showing soaring gasoline and energy
costs had driven up consumer prices last month at their fastest rate
since November bolstered that view.
Ken Landon, global currency strategist at JP Morgan Chase in New
York, said the data "supports the recent expectations that the Federal
Reserve is going to hike rates. Big picture, this supports a strong
U.S. short-term interest rate futures were pricing in three quarter-percentage point rate hikes from the Fed by year end.
The Irish "no" vote on the Lisbon Treaty "does not help" the euro,
BNP Paribas strategists said, because "it will slow political
The dollar also hit a near-four month high of 108.38 yen before
paring gains to trade at 108.20 yen. For the week, the dollar is up 3.2
percent against the yen, poised for its biggest weekly gain in more
than four years.
The Bank of Japan kept interest rates steady at 0.5 percent on Friday, as widely expected.
EYES ON G8
Dollar momentum could be boosted further if U.S. Treasury Secretary
Henry Paulson and other finance ministers attending a weekend Group of
Eight finance ministers meeting in Japan issue dollar-supportive
The euro took an early hit on Friday after French Economy Minister
Christine Lagarde said on arriving in Japan that the recent
strengthening of the dollar was "satisfying."
While analysts don't expect new language about the dollar to end up
in the meeting's closing communique, it could still grab headlines at a
gathering expected to focus on commodity price gains and their threat
to global growth.
A recent International Monetary Fund study said gold and oil prices
rise by more than 1 percent for every 1 percent decline in the dollar.
Even though central bankers will not be on hand at the G8 meeting in
Osaka, "the market really can't afford to be long euros going into it,"
said Alan Ruskin, chief international strategist at RBS Greenwich
Capital in Greenwich, Connecticut.
But he said dollar selling could re-emerge next week, particularly
if the G8 meeting passes without incident and investors start
refocusing on sluggish U.S. growth.
The Reuters/University of Michigan Surveys of Consumers, on Friday
showed U.S. consumer confidence tumbled more than expected in June,
hitting another 28-year low.
Strategists at UBS said they still expect U.S. manufacturing output
to weaken and housing prices to keep declining, putting a strain on
consumers and overall growth.
"These are reasons to be cautious on the dollar in the near term," they wrote in a note to clients on Friday.
(Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss
in New York and Eric Burroughs in Tokyo, Editing by Chizu Nomiyama)
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