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Monday April 17, 2006 - 10:24:26 GMT
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FOREX-Dollar dips on worries Fed to soon end rate hikes

FOREX-Dollar dips on worries Fed to soon end rate hikes
Mon Apr 17, 2006 2:09am ET164

By Rika Otsuka

TOKYO, April 17 (Reuters) - The dollar retreated in thin Easter holiday trade on Monday, hurt by worries the Federal Reserve will soon draw the curtain on a nearly two-year campaign of raising short-term interest rates.

Traders said sentiment for the dollar was dampened by an article in the Wall Street Journal saying some Fed officials are not convinced they need to keep raising interest rates beyond an expected move in May.

Greg Ip, the paper's Fed correspondent who is seen as sometimes reflecting the central bank's thinking, said that while markets are expecting the Fed to raise rates in May and possibly June, Fed officials "are not convinced that much action will be needed".

Ip cited comments from speeches last week by Fed Governors Donald Kohn and Susan Bies as suggesting that the moment for a pause is approaching.

Kohn said on Thursday the Fed was aware it risks overshooting on monetary policy tightening, given the delay between its rate hikes and their impact on the economy.

Bies also said on Thursday the Fed is getting closer to calling a halt to its string of interest rate rises.

"Ip's report made some dealers nervous," said Mitsuru Sahara, a senior trader at Bank of Tokyo-Mitsubishi UFJ. "The market is turning more sensitive to any risks that could push the dollar down."

Dealers were afraid of being caught with dollar long positions ahead of this week's potentially market-moving events, including Chinese President Hu Jintao's first formal visit to the United States at a time of trade tensions between the countries

By 0550 GMT, the dollar was down 0.4 percent at 118.25 yen but recovered from a low at 118.00 yen. The euro climbed about 0.4 percent to $1.2170 from near $1.2110 in late Tokyo trade on Friday.

Dealers said moves were exacerbated by thin trading with many financial centres closed for Easter holidays. Markets in the United States were closed on Friday but reopen on Monday, while markets in Britain and elsewhere will remain closed.

For the year the dollar has lost about 3 percent against the euro but mainly has been stuck in ranges, with major currencies locked in a tug-of-war as other central banks also lift short-term rates or prepare to do so, as with the Bank of Japan.

Adding to the dollar's woes, Cheng Siwei, a vice chief of China's parliament, repeated a call made earlier this month for Beijing to reduce the amount of U.S. bonds it buys while stepping up imports from the United States.

Cheng made similar comments in early April that dented the dollar and stirred more talk of central banks diversifying reserves away from the dollar.

Investors were also reluctant to buy the dollar ahead of the March producer price index on Tuesday and March consumer price index on Wednesday, which may provide clues to how much further the Fed will boost interest rates.

The Fed has lifted rates 15 straight times to 4.75 percent and is widely expected to bump rates up to 5 percent at its next policy meeting in May.

The U.S. central bank's steady rate tightening helped the dollar rise 15 percent against the yen and the euro last year.

The market will also eye February U.S. capital flows data at 1300 GMT to see whether the United States is attracting enough foreign capital to fund its massive trade gap

Economists expect $62.8 billion in net capital inflows, down from $66.0 billion in net inflows in January. The U.S. trade deficit narrowed to $65.7 billion in February from a record $68.6 billion a month earlier.

In 2005, a net $851.3 billion of foreign capital flowed into the United States, surpassing the record $723.6 billion trade deficit for the year and helping ease some of the persistent worries about the country's ability to lure foreign funds. (Additional reporting by Eric Burroughs)

© Reuters 2006. All Rights Reserved.


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