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Tuesday May 9, 2006 - 10:12:15 GMT
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FOREX-Dollar steadies but outlook vulnerable as Fed looms

FOREX-Dollar steadies but outlook vulnerable as Fed looms

(adds quotes, updates prices)

By Veronica Brown

LONDON, May 9 (Reuters) - The dollar steadied against major rivals on Tuesday but the outlook stayed shaky, with investors awaiting the U.S. Federal Reserve's rate decision on Wednesday and a key report to see if China would be named a currency manipulator.

The greenback has seen short-covering since hitting one-year troughs on Monday against the euro, sterling and Swiss franc, but sentiment has been undermined by expectations that its interest rate advantage is set to narrow.

The Fed is widely expected to lift its funds rates for the 16th straight time to 5 percent from 4.75.

But investors are uncertain about the Fed's action beyond that and are eager to see if the central bank points to a pause in the current tightening cycle in its post-meeting statement.

"The key question remains what the Fed says as opposed to what they do -- it would have to be quite a direct statement that the Fed will continue to tighten for the dollar to get a lift from here," Steve Noble, senior manager of FX sales at Lloyds TSB Financial Markets, said.

"It's probably just the case that they will allow room for the data to dictate policy from now on," he added.

The market is also focusing on a U.S. Treasury report on currency practices of trading partners due on Wednesday, with some analysts speculating that the government might name China as a currency manipulator.

Analysts said such action by the United States could trigger further gains in the yen, which is often treated as a proxy for China's yuan.

But some said it was unlikely China would be named.

"Our view is that the Treasury report may be marginally dollar-positive in the short-term given that its unlikely that they will name China as a manipulator," Westpac currency strategist Geoff Kendrick said.

By 0936 GMT, the euro was steady on the day at $1.2696, after hitting a one-year high of $1.2787 on Monday.

The dollar was down slightly at 111.57 yen after hitting an intraday trough of 111.23 yen overnight in Asian trade -- near an eight-month low of 110.97 yen hit on Monday.

It was up 0.1 percent against sterling at $1.8559 .


The yen hit a six-week high against the euro after a media report stoked expectations the Bank of Japan will raise interest rates as soon as July.

Jiji Press news agency reported that the BOJ would upgrade its description of the economy, replacing the word "recovery" with "expansion" in its upcoming monthly assessment, driving the yen higher across the board.

Such a change would be the first since 1991 and underscores that the central bank is moving closer to boosting short-term rates for the first time in six years.

The euro stood at 141.65 yen after falling as low as 141.24, its weakest since late March.

The yen also made solid ground against the New Zealand dollar , and the Kiwi was the biggest loser against the U.S. dollar -- falling more than one percent on the day at one point beyond $0.6250 .

Analysts cited continuing pressure on commodity currencies and the prospect of a diminishing rate advantage over the yen.

The yen has surged overall since the Group of Seven economic powers last month called for countries with trade surpluses to allow more currency appreciation, singling out China and Asia.

"The market is clearly favouring the yen at the moment," said Kota Kimura, forex manager at Shinkin Central Bank. "It's not so easy to reverse that."

Japanese Finance Minister Sadakazu Tanigaki said on Tuesday that excessive movements in the foreign exchange market were undesirable but declined to comment on Japan's forex intervention policy.

Several other major events are slated for this week, including euro zone growth figures on Thursday and U.S. trade data at week's end.

© Reuters 2006. All Rights Reserved.


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