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Wednesday June 25, 2008 - 23:10:18 GMT
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FOREX NEWS-Dollar down as Fed fails to give strong rate signal

Wed Jun 25, 2008 4:20pm EDT

* Dollar slides; statement viewed as not "overly hawkish"

* Euro rises to two-week highs vs dollar

* Markets trim rate hike expectations (Updates prices, adds comments, byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, June 25 (Reuters) - The dollar fell to two-week lows versus the euro on Wednesday, as the Federal Reserve failed to give a strong enough signal that it would aggressively raise interest rates this year.

The Fed on Wednesday held benchmark rates steady at 2.0 percent and expressed worries about upside risks to inflation. But it also said it expects price pressures to moderate this year.

That has pared back expectations of interest rate increases. Futures show a 33 percent chance that the Fed will raise rates in August, down from 48 percent before the decision was released. A rate increase though was fully priced by the September Fed meeting.

"It looks like they (the Fed) are trying to keep their options relatively open. It doesn't look like they are trying to signal to the market that a rate increase is forthcoming in the near term," said Stephen Malyon, senior currency strategist, at Scotia Capital in Toronto.

"I think the response is a reflection of the argument that they have left their options open and they are not signaling very strongly to the market what they intend to do next," he added.

In contrast, the European Central Bank has flagged a rate increase in the euro zone next month from the current 4.0 percent. That should preserve the appeal of euro zone assets over dollar-denominated ones.

The euro <EUR=> rose to two week highs versus the dollar at $1.5686, up 0.8 percent on the day. By late trading, the euro was still up 0.7 percent at $1.5674.

The dollar fell 0.1 percent to 107.70 yen <JPY=>. Against the Swiss franc, the dollar slid 0.6 percent to 1.0351 francs <CHF=>, while the pound rose 0.2 percent to $1.9755.

The statement also showed Dallas Fed President Richard Fisher voting against holding rates unchanged and preferred an increase in the target for the federal funds rate at this meeting.

"There was some speculation that (Philadelphia Fed President) Charles Plosser would join Fisher, but he didn't, so we didn't get two dissenters," said Ken Landon, global currency strategist, at JP Morgan Chase in New York. Plosser, a voting member of the Federal Open Market Committee this year, has voted against the Fed's last two rate cuts.

"At the margin, the doves would make a case that this was not as hawkish as they would expect, although the statement did meet the minimum standards on hawkishness," he added.

Surging energy and food prices have forced other central banks in the developed and developing world to raise rates in recent months, and the ECB has signaled that it's likely to follow suit in July with a quarter-point move to 4.25 percent.

Norway's central bank raised rates by a quarter-percentage point on Wednesday to 5.75 percent and signaled the possibility of more to come. That pushed the euro down 0.4 percent to 7.9420 Norwegian crowns <NOK=>.

Separate data on Wednesday showing new home sales fell less than expected in May had little impact on currencies, but analysts said that the increase in the housing inventory for the month was worrying.

"This suggests that price capitulation has thus far had no impact on bringing the massive housing inventory overhang lower," said Brian Dolan, chief currency strategist, at in Bedminster, New Jersey. "This continues to be a negative for home prices going forward."

(Additional reporting by Lucia Mutikani; Editing by Diane Craft)

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