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Friday April 28, 2006 - 10:58:18 GMT
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FOREX-Dollar hits 7-mth low as Fed signals rate hike end

FOREX-Dollar hits 7-mth low as Fed signals rate hike end
Fri Apr 28, 2006 6:12am ET15

(Updates price, adds quotes, changes byline)

By Natsuko Waki

LONDON, April 28 (Reuters) - The dollar fell to a 7-month low against European currencies on Friday, building on losses after the Federal Reserve chief gave the clearest signal yet that interest rates may be near a peak.

The U.S. currency took a tumble on Thursday after Fed Chairman Ben Bernanke said in congressional testimony that "at some point in the future" a pause in the central bank's two-year campaign of rising interest rates may happen.

He dealt another blow to the dollar by saying that global imbalances, a term interpreted by markets to refer to the gaping U.S. trade deficit and surpluses in Asian countries such as China, may affect the currency.

In the euro zone, the business climate indicator rose to a five-year high in April and the annual inflation rate rose in the same month, supporting expectations of steady rate hikes.

"The dollar is still under pressure. Price pressures still exist in the euro zone and the market is about to think the U.S. interest rate cycle will end soon," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

By 0950 GMT, the euro had risen to the 7-month high of $1.2567 after surging through the psychologically key $1.25 barrier on Thursday.

The dollar has remained under pressure since last weekend when finance chiefs of the Group of Seven major powers urged China and other Asian countries to let the currencies rise to help mend global imbalances.

The dollar was steady at 114.18 yen, off Thursday's 3-month low of 113.81. The greenback fell to a seven-month low against a basket of currencies.

Sterling also rose to a seven-month high of $1.8095.


The Swiss franc was the biggest mover of the day, hitting a seven-month high against the dollar and also rose against the euro.

The closely-watched KOF indicator of business expectations rose to 2.03 in April from 1.90 in the previous month, underscoring the robust state of the economy.

It also benefited from comments from Swiss National Bank chairman Jean-Pierre Roth signalled more interest rate hikes. Roth added a further weakening in the Swiss franc would speed up the tightening.

"The SNB wants to nip in the bud the possibility of the euro/Swiss franc moving further up. They don't want the weaker Swiss franc when the economy is robust and there might not be any spare capacity left," Praefcke said.

The Swiss currency also drew support from safe-haven flows as tensions surrounding Iran escalated.

The world's nuclear watchdog is likely to confirm in a report to the U.N. Security Council on Friday that Iran has flouted demands to stop enriching uranium, a verdict that could unleash moves to hit Tehran with sanctions.


Analysts say an end to the Fed's current cycle of hiking rates would remove a pillar of support for the dollar that helped it rally in 2005, especially with both the euro zone and Japan expected to tighten policy this year.

For clues about the future of U.S. rates, traders were awaiting economic growth figures for the first quarter, due at 1230 GMT. Economists forecast the data to show the economy expanded at a healthy pace.

"I think we are back into a downtrend in the dollar. The rate cycle is coming to an end and trade (deficit) issues are resuming their importance," said Niels Christensen, senior currency strategist at Societe Generale in Paris.

The yen drew support from a barrage of upbeat data, with nationwide inflation at an 8-year high in March, that reinforced expectations that the Bank of Japan will raise interest rates as early as July.

Bank of Japan Governor Toshihko Fukui said that interest rates should be adjusted if the economy continued to recover as the central bank expected.

Most European markets are closed on Monday for Labour Day and Japanese financial markets will be closed for a part of next week for the Golden Week holiday.
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© Reuters 2006. All Rights Reserve


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