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Thursday May 18, 2006 - 10:26:10 GMT
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FOREX-Dollar halves recent gains, eyes Fed speakers

FOREX-Dollar halves recent gains, eyes Fed speakers
Thu May 18, 2006 6:01 AM ET

(Updates prices, adds quotes)

By Natsuko Waki

LONDON, May 18 (Reuters) - The dollar halved the previous day's stellar gains on Thursday as investors awaited clues on U.S. interest rates from Federal Reserve officials due to speak later, in the wake of stronger-than-expected U.S. inflation data.

The greenback rallied on Wednesday as French Finance Minister Thierry Breton said that "everything" must be done to prevent the euro from strengthening too much against the dollar. Germany's economy ministry also said that an ongoing rise in the euro could harm exports.

U.S. inflation on the closely-watched core index -- ex-food and energy -- rose 0.3 percent for a second month running in April, raising expectations the Fed might extend its nearly two-year-old campaign of tightening next month.

"We got a reminder that the risk of inflation is still on the upside. We don't think the market will suddenly move into an environment that inflation is bad for the dollar. It's on balance positive as long as the Fed has to raise rates again," said Adam Baines, currency strategist at Citigroup.

"Comments from the euro zone were significant because they (policymakers) had been so quiet until now. It signals concern is building and it could feed back into monetary policy in the euro zone."

By 0950 GMT, the euro extended earlier gains to 0.5 percent at $1.2788 , after falling one percent in New York session on Wednesday.

Against the yen, the dollar was down 0.3 percent at 110.62 , having hit a 8-month low of 108.96 the previous day.

The euro was up slightly at 141.50 yen , off a seven-week low near 140.10 yen hit on Wednesday.

Fed officials including Chairman Ben Bernanke are due to speak later in the session. Bernanke is expected to take questions after speaking at a Chicago Fed conference on bank structure and competition.

U.S. Treasury Secretary John Snow is also due to testify on international economic and exchange rate policies later in the day at the Senate Banking Committee.

Any reference to current exchange levels or trade imbalances that appear to support a weaker U.S. currency are likely to lead to dollar selling, dealers said.


A possible U.S. rate hike next month would help the dollar to maintain its rate advantage over other currencies.

But some in the market cited concerns that the central bank, after boosting rates at 16 straight meetings, could face the risk of excessive credit tightening given that economic growth is seen tapering off later in the year.

On the more structural side, government and central bank officials around the world have been cranking up their rhetoric against dollar weakness after the currency's sell-off following a meeting of the Group of Seven economic powers last month.

At the meeting, officials called on emerging countries especially China to adopt more currency flexibility to fix global imbalances.

Analysts say a further possible rise in the euro could slow the pace of interest rate hikes by the European Central Bank as it effectively tightens the region's monetary conditions.

But on a trade-weighted basis , the magnitude of euro appreciation is not as pronounced as euro/dollar.

"The up-move in the euro TWI due to dollar weakness has been moderated by significant euro depreciation against most crosses (yen, sterling, Swiss franc, Norwegian crown)," Barclays Capital said in a note to clients.

The euro hit a four-month low against the Swiss franc of 1.5453 on Thursday as the Swiss currency benefited from expectations for interest rate hikes and risk aversion flows.

Elsewhere, the Icelandic crown rose against the euro and dollar after the country's central bank raised its key interest rates by 75 basis points to 12.25 percent, delivering its 14th increase in two years.

© Reuters 2006. All Rights Reserved.


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