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Tuesday August 5, 2008 - 09:24:04 GMT
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FOREX NEWS-Dollar supported by lower oil, Fed eyed

Tue Aug 5, 2008 4:46am EDT

* Dollar index hits 7-week high of 73.775 .DXY

* Aussie dollar slides as rate cut expectations grow

* Yen up broadly as investors take profit on crosses

* Lower oil price boosts dollar; Fed statement eyed

By Simon Falush

LONDON, Aug 5 (Reuters) - The dollar rose to a 7-week peak against a basket of major currencies on Tuesday, drawing support from a sharp drop in oil prices ahead of an interest rate decision from the U.S. Federal Reserve.

Oil prices fell to a 3-month trough at around $120 per barrel CLc1, supporting the dollar because the U.S. economy is such a heavy energy consumer, while commodity currencies suffered as metal prices slid to multi-month lows.

The sliding oil price also dented other currencies because it will enable them to cut rates in the future, analysts said.

"Crude is down about 20 percent since the peak in mid-July and obviously this will allow central banks in general to pursue a more accommodative policy, in particular those central banks where rates are still fairly high," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.

By 0753 GMT the dollar index, which measures the U.S. currency's performance against a basket of six currencies, was up 0.33 percent at 73.767 .DXY, having reached as high as 73.775 -- the highest since mid-June. The euro fell to its lowest in six weeks at $1.5500 <EUR=>.


The Australian dollar extended its recent slide, striking a 4-month low against the greenback at $0.9206 <AUD=>, hit by sharp falls in metals prices and after the Australian central bank on Tuesday opened the door to cutting interest rates.

As expected, the Reserve Bank of Australia kept interest rates on hold at 7.25 percent, but said in a statement that scope to move towards less restrictive policy is increasing, paving the way for future rate cuts. [ID:nSYA004446]

The sharp slide in the Aussie dollar contributed to a steep rise in the yen against a range of currencies as investors tend to buy the low yielding Japanese currency when high yielding currencies fall.

The Aussie dollar was down 1.2 percent at 99.39 yen <AUDJPY=> while the euro was down 0.75 percent at 167.36 yen <EURJPY=>, and the dollar lost 0.5 percent at 107.73 yen <JPY=>.

Investors were focused on the Federal Reserve's policy decision later in the day and with rates seen staying on hold at 2 percent FEDWATCH, the central bank's post-meeting statement will be scoured for clues on the monetary policy outlook.

"On the inflation front, they may alter the wording somewhat from 'increased' upside risks to inflation, perhaps to something stressing the still elevated level of upside risks," said Daragh Maher, deputy head of global foreign exchange at Calyon.

"Thus, the overall message will be balanced between concerns over activity and price pressures."

Some upbeat U.S. economic data on Monday generated optimism about the prospects for the broader economy while unexpected surges in consumer prices raised the possibility of higher interest rates by the end of the year.

The Fed is widely expected to keep benchmark interest rates steady at 2.0 percent as it weighs higher risks of inflation and threats to economic growth.

The euro fell 0.4 percent to $1.5507 <EUR=>, and briefly dipped below $1.55 as investors awaited more central bank meetings later this week including the Bank of England and European Central Bank.

The New Zealand dollar was under pressure and Finance Minister Michael Cullen said on Tuesday that the country is not immune to the global financial storm. [ID:nWEL33144]

The New Zealand dollar slid 0.6 percent to $0.7240 <NZD=>, hitting a fresh 10-month low at $0.7242. (Additional reporting by Alastair Sharp; Editing by Ruth Pitchford)

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