Thursday March 24, 2005 - 15:33:03 GMT
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ACM REFCO - www.ac-markets.com
Dollar hits a 6 week high versus yen
The dollar cleared a six-week high against the yen on Thursday, building on gains after U.S. inflation data increased expectations the Federal Reserve may raise interest rates more aggressively.
The yen was also on the back foot after data on Thursday showed big Japanese firms were less upbeat about business conditions and planned to cut back on capital spending, adding to worries about an economy already suffering from weakening exports.
Dealers said the dollar, which held near five-week peaks against the euro, was still being buoyed by data on Wednesday showing U.S. consumer prices rising at the fastest year-on-year pace since 2002.
"People are revising higher their expectations for U.S. interest rates which will keep the dollar supported in the near term," said Adam Myers, currency strategist at Societe Generale in London.
The consumer price data had particular resonance, coming just a day after the U.S. central bank raised interest rates for a seventh consecutive time and warned of inflationary pressures ahead.
The dollar traded as high 106.51 yen by 1030 GMT, a six week peak and on track for a sixth straight day of gains.
The yen fell a third of a percent against the euro to trade around 138.15 yen per euro.
The euro was steady at $1.2980 but within striking distance of Wednesday's five-week low below $1.2960.
The single European currency has now shed more than six cents from record high scaled last December.
So far this year, expectations of strong U.S. growth and higher U.S. interest rates have helped the dollar arrest a three-year slide on worries about the United States' ability to fund its swelling current account and budget deficits.
YEN UNDER PRESSURE
Japan's business survey index for the January-March quarter fell to 0.6 from 2.1 in the previous quarter, reflecting the impact on confidence of higher oil and commodity prices.
"The data from Japan is a factor in this but that's at the margin," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi.
"We are starting to see a change in hedging activity by Japanese corporations and Japanese investors. They are unwinding hedges that are too aggressive. Costs of hedging for Japanese investors, with U.S. interest rates rising, are at their most expensive since 2001," said Halpenny.
Recent data from the euro zone has also pointed to a sluggish growth outlook.
A survey on Wednesday showing business sentiment in Germany deteriorated for a second straight month in March was followed on Thursday by one from Italy showing business morale at a 20-month low.
Trade has started to thin ahead of a holiday on Friday in much of Europe and the United States before Easter. Many see the dollar staying firm until April 1, when U.S. jobs data could shed further light on the U.S. rate outlook.
Most economists expect the Fed to stick with quarter point rate increases for its next policy meetings in May and June, though more evidence of stronger economic growth and mounting inflation pressures could quickly change that outlook.
Although higher inflation usually erodes a currency's purchasing power, the Fed's promise to stamp out price pressures with higher rates could help lure foreign investors to short-term dollar deposits.
The U.S. central bank lifted the fed funds rate on Tuesday to 2.75 percent, further above the euro zone's comparable rate of 2 percent and virtually zero percent in Japan.
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