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Wednesday April 19, 2006 - 10:56:21 GMT
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FOREX-Dollar hits 7-mth low vs euro on Fed rate outlook

FOREX-Dollar hits 7-mth low vs euro on Fed rate outlook
Wed Apr 19, 2006 6:37am ET168

(Updates prices, adds comments, changes byline)

By Veronica Brown

LONDON, April 19 (Reuters) - The dollar hit a 7-month low against the euro on Wednesday, extending losses made after minutes from the Federal Reserve's March meeting signalled dollar-supportive U.S. interest rates were close to peaking.

The dollar also briefly slipped to a fresh three-month low versus the Swiss franc and a 2-1/2 low against sterling, pressured by the minutes as well as softer than expected data for U.S. producer prices and housing starts.

"The focus does appear to be shifting towards dollar bearishness but it's not clearly one sided and people are not running away with short dollar positions. It reflects start-stop rally characteristics in the euro/dollar," Deutsche Bank foreign exchange strategist Trevor Dinmore said.

The minutes from the March 27-28 policy meeting released on Tuesday said: "Most members thought that the end of the tightening process was likely to be near and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy."

At the meeting, the first under new Chairman Ben Bernanke, the Fed raised the overnight rate to 4.75 percent, its 15th quarter percentage point increase in as many meetings since June 2004.

The market still expects another rise at the next meeting in May, but the minutes trimmed prospects for a further tightening beyond that, analysts said.

Helping to cement such expectations, San Francisco Fed President Janet Yellen said on Tuesday that the Fed was "highly alert" to the possibility of too much monetary tightening.

By 1010 GMT, the euro was flat at $1.2346 after rising to a seven-month high of $1.2373 earlier.

The dollar bought 117.00 yen, steady on the day, while it also stood at 1.2703 Swiss francs after having slipped to 1.2667 francs, a three-month low.

Sterling hit a fresh 2-1/2 month high, extending the previous day's gains to $1.7878 after minutes from the Bank of England Monetary Policy Committee's last meeting showed a 7-1 vote to keep rates unchanged at 4.5 percent.


For more clues about the direction of U.S. rates, the market was looking to consumer price data for March due later in the session. Economists expect a 0.4 percent rise in prices from February, when they edged up 0.1 percent.

"The unwinding of rate hike expectations beyond May 10 and hence further dollar losses could come as early as today if U.S. March CPI surprises to the downside of the consensus forecast," RBC Capital Markets analysts said in a note to clients.

Elsewhere, the Icelandic crown hit a four year low against the euro and a 2-1/2 year low against the dollar as local market trading opened after firm wage growth data ignited worries that the economy was overheating.

The currency has been under pressure in recent months since Fitch ratings agency downgraded its outlook on Icelandic debt to negative in late February.

The yuan strengthened on Wednesday as Chinese President Hu Jintao visits the United States this week. Washington has urged Beijing to let the yuan appreciate more quickly, saying an undervalued currency gives China's exports an unfair advantage and helps fuel the massive U.S. trade deficit.

Hu will meet U.S. President George Bush on Thursday.

"This stronger appreciation is useful for Mr Hu's state visit since it appears a goodwill signal on the yuan issue," Sebastien Barbe, currency analyst at Calyon, wrote in a research note.

© Reuters 2006. All Rights Reserved.


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