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Tuesday April 5, 2005 - 06:50:54 GMT

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Dollar hits 5-month high vs yen as U.S. rates eyed

The dollar rose to a fresh five-month high against the yen on Tuesday, extending a two-week rally on expectations U.S. interest rates will keep rising and rates of rival currencies won't change soon.

Traders said the market was turning its attention to a speech by Federal Reserve Chairman Alan Greenspan on energy, due at 1750 GMT, for clues on the Fed's view of the U.S. economy amid soaring oil prices.

"The dollar's trend is clearly bullish as it's no longer reacting to negative news," said Yoshiharu Yanagisawa, head of forex trading at State Street in Tokyo.

"The dollar could rise further if Greenspan says anything positive and I think the market will just ignore it if he says anything negative."

By 0125 GMT, the dollar fetched 108.45 yen, its highest level since Oct. 20, and up from 108.30 yen in late U.S. trade on Monday.

The euro was slightly down at $1.2835, just above a seven-week trough of $1.2818 marked the previous day.

The dollar has rallied around three percent against the yen and about 2.5 percent versus the euro since the Fed suggested two weeks ago that it could raise interest rates more quickly than the current moderate pace if inflation heated up.

The Fed has raised rates by a quarter percentage point seven times since June, boosting its base lending rate to 2.75 percent.

In contrast, the European Commission downgraded on Monday growth forecasts for the euro zone to 1.6 percent in 2005 from an original estimate of 2.0 percent due to high oil prices and the euro's relative strength.

Traders said this highlighted the sluggishness of the euro zone economy and made it difficult for the European Central Bank to raise rates.

Both the ECB and Bank of England are expected to hold rates at 2 percent and 4.75 percent, respectively, when they meet on Thursday.

The Bank of Japan and the Reserve Bank of Australia will hold policy meetings on Tuesday, with the BOJ expected to keep rates unchanged.

Economists in a Reuters poll gave a 60 percent chance of the RBA raising rates by 25 basis points to 5.75 percent. Any rate change would be announced at 2330 GMT on Tuesday.



The dollar scaled five-month peaks against the yen and touched a seven-week high versus the euro on Monday on the widening interest rate differentials between the United States and Europe and Japan.

Higher U.S. rates often bolster the currency by making dollar-denominated assets more attractive to investors globally.

Weekend comments by St Louis Federal Reserve President William Poole, in which he said U.S. growth was strong and the central bank needs to confront the risk of higher inflation, also helped the dollar. The currency rose above 108 yen for the first time since October.

Investors believe "the dollar is going to be a high-yielding currency and they are comfortable holding the dollar," said Chris Melendez, president of Tempest Asset Management in Newport Beach, California. Poole's comments are "sign of just a little more hawkish Fed."

In late New York trade, the dollar rose to 108.26 yen, up about 0.6 percent from late Friday, after hitting a five-month high of about 108.42 yen, according to Reuters data. New York traders said options barriers were triggered earlier at 107.80 and 108.00 yen.

Also supporting the dollar, analysts said, was news from Japan that the country will not change its foreign reserve currency mix, as this could destabilize the markets.

From a technical perspective, the greenback's three-year underperformance against the yen is over and a "new trend of outperformance may be beginning," according to a report from Asbury Research in Chicago.

The euro fell to $1.2819, its lowest since Feb. 10, according to Reuters data, before recovering to $1.2852 in late trade, still weaker for the day. Earlier in the session, the European Commission downgraded growth forecasts for the euro zone to 1.6 percent in 2005 from an original estimate of 2.0 percent due to high oil prices and the euro's recent strength.

Analysts said the downgrade was expected following recent weak data, but may make it harder for the European Central Bank to justify raising interest rates.

Investors anticipate both the ECB and the Bank of England will hold rates at a respective 2 percent and 4.75 percent when they meet on Thursday. By contrast, the Fed is widely expected to raise rates for an eighth successive time when it next meets, with more to follow.

Some investors may see euro weakness in recent days as a buying opportunity, traders said.

"The market is eyeing $1.2750 and is expressing interest to buy euros (at that level) to either hedge or even enter into new long positions," said Manfred Wolf, director of foreign exchange, at HVB Bank in New York.



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