Tuesday August 5, 2008 - 21:11:54 GMT
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Reuters - www.reuters.com
FOREX NEWS - Dollar gains on oil plunge, Fed's inflation-focus
* Dollar climbs to seven-week high against euro
* Fed holds benchmark rates steady at 2 percent
* Oil price fall helps dollar
(Recasts, updates prices, adds comments, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 5 (Reuters) - The dollar climbed to
seven-week peaks against the euro and a major currency basket
on Tuesday, as oil prices plunged and the Federal Reserve
maintained its focus on quelling persistent U.S. inflation
pressure in the economy.
The dollar briefly pared gains against the euro and yen
immediately after the decision, which kept rates steady at 2
percent. Investors were disappointed that there was only one
dissenter to the Fed decision, with Dallas Fed President
Richard Fisher opting for higher rates.
Markets were expecting Philadelphia Fed President Charles
Plosser to dissent as well because of an onslaught of tough
comments on inflation over the last few weeks.
Overall, the dollar kept its bid tone. Analysts said
Tuesday's Fed statement was more balanced than what the market
had expected, as it expressed concern about both economic
growth and inflation. For details see [ID:nN05304800].
"The (Fed) statement does not point to one clear rate
path," said Dustin Reid, director of forex strategy at ABN AMRO
in Chicago. "Clearly, the statement continues to focus quite a
bit on upside inflation risks, but the reintroduction of
downside growth risks coupled with the 10-1 vote gives the
doves/(dollar) bears more leverage." he added.
In late trading in New York, the euro was down 0.7 percent
on the day at $1.5461 <EUR=>, having traded as low as $1.5448,
the lowest since June 16, according to Reuters data.
The ICE Futures U.S. dollar index, which measures the U.S.
currency's performance against a basket of six currencies,
climbed as high as 73.990 .DXY, its highest since mid-June.
It last traded up 0.6 percent at 73.936.
Following the Fed decision, prospects for the U.S. central
bank to increase benchmark rates by 25 basis points in
September fell as low as 24 percent from 34 percent earlier.
The first quarter-point rate increase by the Fed is not priced
until a rate-setting meeting in January, although a rate
increase in December is still 90 percent priced in.
OIL DROP BOOSTS DOLLAR
The drop in oil helped ease fears that high energy prices
will continue to weigh on the U.S. economy at a time consumer
prices are showing an unexpectedly fast rise. Oil's continued
weakness has underpinned the dollar in recent weeks.
Oil fell to a three-month trough of $118 per barrel CLc1
while metals and other commodity prices dropped further as
concerns over slowing global demand sparked profit-taking. It
last traded down 2.3 percent at $118.60 per barrel.
Gold, a natural hedge against inflation, sank 2.2 percent
to 874.10 per ounce <XAU=>. So far this month, gold has dropped
more than 4 percent.
"Despite the Fed and the ECB meetings this week, oil is
really becoming the short-term focus in the foreign exchange
markets," said Omer Esiner, a currency analyst at Ruesch
International in Washington, D.C. "It is really helping push
the dollar up."
Interestingly though, the Fed made no mention of the recent
weakness in commodity prices, except by saying that "earlier
increases" in commodity prices have resulted in higher
inflation and inflation expectations.
Marco Annunziata, chief economist at Unicredit Markets and
Investment Banking in London, said it may be too soon to tell
whether commodity prices have indeed corrected. But he agreed
with the Fed's decision to keep the statement "balanced",
confirming his view "the Fed is looking for the right time to
start normalizing rates."
Earlier in the session, data showed the U.S. service sector
shrank slightly in July but by less than economists had
expected. [ID:nN05340262]. Analysts said the report added to a
growing body of evidence in recent weeks that the U.S. economy
was more resilient than many initially had thought.
The Australian dollar, meanwhile, was among the weakest
performers on Tuesday, falling to a four-month low at US$0.9134
<AUD=>. The Reserve Bank of Australia kept interest rates at
7.25 percent on Tuesday but sent a strong signal it will ease
soon amid tighter credit conditions and slowing demand. The
Aussie dollar was down 1.4 percent at US$0.9158.
(Additional reporting by Vivianne Rodrigues; Editing by James
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