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Monday June 23, 2008 - 23:01:07 GMT
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FOREX NEWS-Dollar gains on euro zone gloom, US rate view

Mon Jun 23, 2008 4:10pm EDT

* 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 pressures.

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 hikes.

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 December 2005.

"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 quarter.

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 commodity. (Additional reporting by Steven C. Johnson; Editing by Jonathan Oatis)

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