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Wednesday August 6, 2008 - 20:36:23 GMT
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FOREX NEWS-US dollar vaults to 7-month high vs yen, risk appetite up

Wed Aug 6, 2008 4:28pm EDT

* Dollar rises broadly, hits seven-month high vs yen

* Fed stance on rates, oil price drop seen aiding economy

* ECB expected to keep rates unchanged on Thursday (Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Aug 6 (Reuters) - The U.S. dollar rose for a fourth straight day to a seven-month peak versus the yen and a six week high against the euro on Wednesday, as the slide in oil prices to a new three month low raised hopes economic growth would pick up and inflation would subside.

"The broader (U.S. dollar) rise is also piggy-backing on the renewed appetite for risk after yesterday's equity market rally, said Adam Fazio, currency strategist at CIBC World Markets in New York. "We are seeing an improved atmosphere for risk appetite based on the slightly dovish Fed statement."

On Tuesday the Fed kept short term interest rates unchanged but was perceived as being slightly more concerned about anemic economic growth than it was about inflation, meaning it was unlikely to raise interest rates in the near future.

UBS said its risk index, a measure of investors' appetite for risk, tumbled to -0.46 on Wednesday, its lowest level since June 2007, compared to 0.10 on Tuesday. An increased appetite for risk usually means the revival of the so-called "carry trade" in which investors borrow in low interest currencies such as the yen, and sell the proceeds to invest them in higher yielding assets such as equities.

The dollar's break above a key technical level around 108.60 yen also contributed to the greenback's rally.

"It's more of a technical circumstance, as 108.60 had been a correction high since we traded down below 100 and bottomed out at 95.71," said Fazio. "The break of 108.60 triggered a bunch of model fund buying interest."

The dollar raced to 109.71 yen <JPY=>, its highest level since early January, according to Reuters data. It was last trading at 109.60 yen, up 1.2 percent on the session. The dollar was on track for its highest daily gain versus the Japanese currency in three weeks.


Demand for the euro fell ahead of the European Central Bank policy meeting on Thursday.

While the bank is expected to leave benchmark borrowing costs steady at 4.25 percent, analysts think ECB President Jean-Claude Trichet could soften his hawkish rhetoric, citing more data pointing to slower euro zone growth.

A report on Wednesday showed German manufacturing orders for June dropped by a sharp 2.9 percent. Separately a German government source said the economy probably shrunk by between 0.75 percent and 1.5 percent in the second quarter.

The euro fell against the U.S. dollar and last traded down 0.3 percent at $1.5412 <EUR=>, a six week low.

"Now the market's attention is shifting to the ECB meeting tomorrow and Trichet is likely to make some pretty hawkish remarks," said Meg Browne, senior currency strategist at Brown Brothers Harriman in New York.

"But he will also have to acknowledge that economic growth in Europe has been pretty slow."

While the interest rate differentials between the United States and Europe still favor the euro in the short term, Browne said slowing growth in the euro zone will eventually lead the ECB to cut borrowing costs despite worries about inflation.

A Reuters poll of 61 strategists taken Aug. 4-6 showed most expect the euro to trade at around $1.54 over the next three months, before retreating to $1.50 in six months and $1.44 a year from now.

The ICE Futures US dollar index, which tracks the dollar's performance against a basket of six currencies rose to a seven week high around 74.293 .DXY.

(Additional reporting by Vivianne Rodrigues;)

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