Monday June 23, 2008 - 23:01:07 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar gains on euro zone gloom, US rate view
* Dollar bought ahead of this week's Fed meeting
* Fed seen focusing on inflation
* Weak Ifo, PMIs denting euro zone rate hike view
(Updates prices, adds quotes, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 23 (Reuters) - The dollar rose on Monday, as
weak euro zone data took the steam out of last week's euro
rally and investors braced for a Federal Reserve statement this
week that will likely focus on rising U.S. inflation
The Fed's inflation mindset when it announces its monetary
policy decision on Wednesday should ensure that U.S. interest
rates will remain unchanged after a string of cuts since
mid-September, analysts said.
Earlier in the session, reports showed high energy costs
had soured German business sentiment and the euro zone's
manufacturing and service sectors contracted in June, denting
the case for higher euro zone interest rates and punishing the
euro across the board. At current prices, the euro on Monday
posted its largest daily loss in about two weeks.
"A lot of the dollar's strength is coming from the euro
trade this morning, with euro-land data quite soft today," said
Mark Frey, head foreign exchange trader at Custom House Global
Foreign Exchange in Victoria, Canada.
At the same time, Frey said what could further support the
dollar is the possibility of some "hawkish rhetoric" from the
Federal Open Market Committee (FOMC) statement.
"Dollar bulls are hoping that the FOMC will go into a firm
neutral stance, although the chances of a rate hike at this
stage are an extreme remote possibility. I really don't think
the Fed is ready to go higher on rates," Frey said.
By late trading, the euro fell half a percent to
$1.5520<EUR=>. The dollar rose nearly 1 percent against the
Swiss franc to 1.0456 francs <CHF=>.
The Fed is expected to hold rates at 2 percent on Wednesday
but the futures markets have priced in a pair of rate hikes by
year end due to surging energy and food price inflation.
"The recent uptick in inflation concerns is likely to be
reinforced in the statement by reference to energy-led price
pressures and rising inflation expectations,' JPMorgan Chase
said in a research note.
"We do not, however, look for any explicit mention linking
the value of the dollar to inflation," the note said.
Unlike the Fed, the European Central Bank has signaled a
rate hike in July, though officials have been at pains to make
clear that this would not necessarily lead to a series of
That view was boosted by Monday's data, which showed the
euro zone manufacturing and service sectors contracted in June,
the latter for the first time in five years, while the German
Ifo business climate index fell to its lowest level since
"When you look at the data, you wonder if even one hike is
justified. But they went out on a limb saying they were going
to hike rates, and now they have to do it," said John McCarthy,
director of foreign exchange at ING Capital Markets in New
York. "It's a bit of a mess, and people are a bit confused."
The dollar index .DXY added 0.6 percent to 73.430, while
the euro fell 0.1 percent to 167.34 yen <EURJPY=>.
Against the yen, the greenback rose 0.4 percent to 107.30
yen <JPY=>, boosted after a Japanese government survey of large
manufacturers showed sentiment deteriorated in the second
The dollar has gained despite firmer commodities on Monday.
U.S. crude futures were up more 1 percent on the day around
$136.95 CLc1 on Nigerian supply disruptions and escalating
tensions between Israel and Iran.
Analysts said the financial markets' range-trading
conditions overall have weakened the correlation between the
dollar and oil. A stronger dollar typically results in weaker
oil prices because it lowers demand for the dollar-denominated
(Additional reporting by Steven C. Johnson; Editing by
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