Wednesday June 18, 2008 - 11:39:22 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dlr's defensive rally fails to break recent ranges
* Dollar gains slightly but overall rate repricing weighs
* ECB's Stark comments back July rate hike expectations
* Sterling softens; BoE minutes show 8:1 split as expected
(Changes byline, updates prices, adds quotes)
By Veronica Brown
LONDON, June 18 (Reuters) - The dollar mounted a defensive
rally against a basket of currencies on Wednesday, but struggled
to break free of recent ranges after a run of weak U.S. data
clouded expectations for a series of Federal Reserve rate hikes.
U.S. short-term interest rate futures on Tuesday showed that
investors had scaled back their expectations for a Fed rate rise
in August to around 50 percent, from 90 percent earlier in the
week. [ID:nN17614345] The Fed is widely expected to keep rates
at 2 percent at a policy meeting on June 24 and 25.
Bets of tightening from the European Central Bank have also
been scaled back in recent days, but a move to 4.25 percent in
July is still widely expected.
Analysts said that trading conditions were expected to
become more volatile, tracking frequent policymaker nuances on
the interest rate outlook in the euro area and United States.
"What we're really having to contend with at the moment is
how central bank rhetoric and economic data is challenging
market expectations for monetary tightening by the end of the
year in the U.S. and euro area," said Kamal Sharma, G10
strategist at JP Morgan in London.
"Over the near term, we think euro/dollar is likely to be a
tug of war between competing central bank rhetoric," he added.
ECB Executive Board member Juergen Stark stuck to the same
song sheet as other ECB policymakers, saying price risks have
increased and the bank is on heightened alert and will do
everything needed to achieve price stability.
By 1041 GMT, the euro was down 0.1 percent on the day at
$1.5481 but was still up 0.45 percent on the week to date
<EUR=>. The single currency also hit an 11-month high at 168.03
yen, according to Reuters data <EURJPY=>.
Against a basket of major currencies the dollar was up 0.2
percent at 73.721 .DXY but down 0.5 percent on the week, still
struggling after data on Tuesday showed U.S. housing starts
growing at their slowest annual rate in 17 years and industrial
production slipping in May, while the current account deficit
widened in the first quarter. [ID:nN17336776]
The U.S. currency was also still under a cloud after last
weekend's G8 ministers meeting failed to give it the clear vote
of confidence many observers were looking for.
Sterling remained on the back foot against the euro
<EURGBP=> and dollar <GBP=> with little reaction to minutes from
the Bank of England's last policy meeting that showed a 8-to-1
vote in favour of keeping British borrowing costs on hold at 5
The market has been speculating on the possibility of a rate
hike from the central bank to tame rising inflation as annual
consumer price inflation hit 3.3 percent, above the bank's 2.0
percent target and its highest since the Labour government took
power in 1997 [ID:nL1771152].
In a letter to the UK Treasury explaining why inflation was
above target, BoE Governor Mervyn King blamed soaring fuel and
food prices, but doused expectations of a rate hike.
"It's obviously a very difficult time to be a policymaker
given the challenges of a slower economy and higher inflation
... a rate increase does not appear to be on the agenda unless
there are signs the period of high inflation looks as if it's
lasting for longer than the (BoE Monetary Policy) committee
currently thinks," Investec economist Philip Shaw said.
King may give further clues on the UK's economic health in a
speech due at 1830 GMT.
Wednesday's calendar also features a speech from San
Francisco Fed president Janet Yellen at 1545 GMT and weekly U.S.
mortgage market data.
(Reporting by Veronica Brown; Editing by Ruth Pitchford)
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