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Wednesday July 16, 2008 - 20:42:58 GMT
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FOREX NEWS-Dollar rebounds from record low vs euro

Wed Jul 16, 2008 4:08pm EDT

* Dollar climbs from record low vs euro, helped by low oil

* Fed minutes, inflation data renew talk of rate hike

* Wells Fargo earnings ease financial market concerns

(Updates prices, adds quotes, adds Fed minutes, adds byline)

By Steven C. Johnson

NEW YORK, July 16 (Reuters) - The dollar rose on Wednesday, moving further from a record low against the euro, as a slide in oil prices and surprisingly strong earnings at Wells Fargo & Co soothed fears about the U.S. economy and financial sector.

U.S. stocks also rallied, while the dollar got an added boost after minutes from the Federal Reserve's June meeting showed officials believed inflation pressures meant the next interest rate move was likely to be an increase.

With separate data showing U.S. consumer prices rose last month at their fastest rate since the aftermath of Hurricane Katrina in 2005, analysts said FX investors were increasingly certain of at least one Fed rate hike before the year is out.

"The first responsibility of any central bank is price stability," said Bank of New York Mellon strategist Michael Woolfolk, who said the Fed could raise rates by September.

"The Fed will eventually sacrifice growth to curb inflation, even if growth looks poor," he said.

The euro was 0.6 percent weaker at $1.5817 <EUR=> as North American trade wound down, well off a record high above $1.60 set a day ago. The dollar was up 0.3 percent at 105.01 yen <JPY=> and 0.9 percent at 1.0174 Swiss francs <CHF=>.

Sterling fell 0.4 percent to $1.9988 <GBP=>.

U.S. short-term interest rate futures are pricing in a 76 percent chance that the Fed raises interest rates from their current 2 percent by December.


Not everyone is convinced the Fed will tighten policy, though. Investor attention remains focused on the U.S. financial sector, analysts say, particularly after the U.S. government was forced to come up with a rescue plan for mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), just as one of the country's biggest mortgage banks, IndyMac, collapsed.

The turmoil around Fannie and Freddie and fears about more credit losses at regional banks drove the dollar sharply lower a day ago, with the euro hitting a record high at $1.6037.

Federal Reserve Chairman Ben Bernanke reiterated to a House of Representatives panel on Wednesday that the risks to U.S. growth have increased along with upside inflation risks, mirroring remarks he made a day earlier before the Senate.

"I think the potential bullish implications of the Fed minutes for the dollar may be tempered by some of Bernanke's somber expectations about the U.S. economy," said Bob Lynch, head of North America FX strategy at HSBC in New York.

Also, while higher interest rates raise the attractiveness of dollar-denominated securities, some analysts fear they would also choke economic growth at a time when investors worldwide are concerned that the U.S. economy could still fall into a recession.

Concerns about the U.S. financial sector receded a bit on Wednesday after Wells Fargo, the fifth-largest U.S. bank, raised its dividend despite a 23 percent decline in profit caused by bad loans. [ID:nN16284000].

The dollar also edged higher when Bernanke told the House panel that currency intervention may be warranted in certain conditions. [nWAT009802]

"Bernanke's no fool, he's been handed a terrible deck of cards and he's in a very rough spot right now," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto.

But he added that dollar gains were largely tied to a fall in oil prices CLc1 after data showed U.S. stocks of crude oil and refined products rose last week.

"At the end of the day, I think you look to pick up some euros down at these levels," he said.

(Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss in New York; Editing by Diane Craft)

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