Wednesday June 25, 2008 - 23:10:18 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar down as Fed fails to give strong rate signal
* 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
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
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
"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
Forex.com in Bedminster, New Jersey. "This continues to be a
negative for home prices going forward."
(Additional reporting by Lucia Mutikani; Editing by Diane
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