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Wednesday May 17, 2006 - 10:19:08 GMT
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FOREX-Dollar dips below 109 yen ahead of U.S. inflation

FOREX-Dollar dips below 109 yen ahead of U.S. inflation
Wed May 17, 2006 6:11 AM ET

(Updates prices, adds fresh comments, changes byline)

By Carolyn Cohn

LONDON, May 17 (Reuters) - The dollar hit an 8-month low against the yen on Wednesday, on a growing market view that it needs to fall to correct imbalances in the global economy.

A weak reading in the U.S. consumer price index for April, due at 1230 GMT, could reinforce market expectations that the Federal Reserve will not raise interest rates in June after tightening credit at 16 consecutive policy meetings.

"Dollar/yen has broken to new lows. There's a longer-term perception in the market that the dollar has to go down as part of the route to remove structural imbalances, which are greatest between Asia and the United States. The trend is continuing," said Adam Cole, senior currency strategist at Royal Bank of Canada.

"Inflation data is critical to rate expectations. A soft core CPI number would take out residual expectations of a June rate hike. The dollar would take another leg down," he added.

The yen got a lift after European Central Bank Governing Council member Christian Noyer told Reuters on Tuesday that more currency flexibility was desirable in Asia, echoing a call made by Group of Seven powers last month for Asian currencies to rise.

By 0955 GMT, the dollar was down around half a percent at 109.12 yen , briefly hitting its lowest level since September 2005 at 108.99, after Japanese Finance Minister Sadakazu Tanigaki said there was no change in Japan's stance on foreign exchange.

The euro was up a third of a percent at $1.2904 .

The single currency rose to the day's highs of $1.2920 after euro zone final inflation came in at 2.4 percent in April, above 2.2 percent in March, as the core rate accelerated to 1.5 percent.

Some analysts see a signficant chance of a 50 basis point euro zone rate rise in June, from the current 2.5 percent.

The euro fell against the yen, hitting a 7-week low at 140.58 yen .

The dollar also came under pressure as tensions between Iran and the West over the country's nuclear programme escalated, some analysts said.


Noyer's comments were seen by some in the market as an effort to shift the focus of the dollar's recent weakness away from the euro.

Meanwhile, speculation from earlier this week about strong U.S. inflation was fading after the dollar was stung on Tuesday by tame U.S. producer prices and housing starts data for April.

"There has been an unwinding of the dollar/Asia trades we saw at the beginning of the week," said Kamal Sharma, currency strategist at Bank of America.

"The market has come round to the view that today's CPI may be relatively subdued."

The Fed is pinning any further rises in its overnight rate, currently at 5 percent, on signs of more buoyancy in the economy and the threat of inflation.

Economists in a Reuters poll expect the CPI data to show consumer prices rising 0.5 percent in April, and core prices edging up 0.2 percent.

Dollar trading has been volatile trade this week, taking a cue from fluctuating prices for commodities and stocks, but most in the market forecast the dollar will keep falling on expectations that its rate advantage will narrow in coming months.

The ECB is forecast to lift rates to at least 2.75 percent in June. And while market expectations have faded for the Bank of Japan to hike rates in June, the BOJ is widely forecast to boost rates from near zero during the July-September quarter.

Gold prices recovered more than 2 percent to above $700 an ounce on Wednesday.

© Reuters 2006. All Rights Reserved.


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