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Wednesday June 7, 2006 - 10:20:56 GMT
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FOREX-Dollar supported as June hike expectations rise

FOREX-Dollar supported as June hike expectations rise
Wed Jun 7, 2006 6:03am ET6
(Updates prices, adds fresh quotes, changes byline)

By Toni Vorobyova

LONDON, June 7 (Reuters) - The dollar hovered near the previous day's one-month peak against the yen and hit 6-day highs against the euro on Wednesday on growing expectations that the U.S. Federal Reserve will raise interest rates later this month.

But the dollar's progress against the euro was limited by anticipation that the European Central Bank will lift rates on Thursday -- a view which was supported by the publication of strong data from the bloc's retail sector on Wednesday.

Comments from Federal Reserve officials this week have convinced more investors that the central bank will extend its two-year credit tightening campaign by lifting rates a quarter point to 5.25 percent at its next meeting on June 28-29.

The dollar rose on Tuesday after St. Louis Fed President William Poole was quoted by the Wall Street Journal as saying that a slowing economy on its own may not reduce inflationary pressures. Fed Governor Susan Bies said the central bank cannot say exactly when it will be done hiking rates.

Their comments chimed with remarks by Fed Chairman Ben Bernanke, who sparked a rebound in the dollar on Monday by saying the Fed needed to be vigilant to make sure inflation stayed under control.

"In the very short term, quite clearly the dollar has had a significant lift from this consistent tone from Fed governors that we've seen since the start of the week," said Simon Derrick, head of currency research at Bank of New York.

"That has certainly fed through to a marked increase in expectations for a move from the Fed this month," he added.

By 0943 GMT, the dollar was trading at 113.22 yen , around 30 ticks below one-month highs set in the previous session. It was also flat on the day against the euro at $1.2823 , having retreated from a session high of $1.2782.


Euro zone retail sales rose 2.8 percent on the year in April, beating the consensus forecast for a 2.3 percent rise. Meanwhile, the Bloomberg/NTC euro zone retail PMI hit its highest level in more than two years in May, at 56.3.

"This seems to be a step in the right direction for faster recovery ahead," David Brown, chief economist at Bear Stearns said in a research report.

Strong euro zone data has fuelled talk that the ECB could raise rates by as much as 50 basis points this Thursday, although most analysts expect a more modest 25 basis point hike to 2.75 percent. Some say it could then hike again in July.

However the upside potential for the euro could be limited, with euro zone finance ministers making clear they do not want the single currency to extend its export-denting rally much beyond current levels around $1.30.

Austria's Finance Minister and current chairman of EU finance ministers Karl-Heinz Grasser said on Wednesday that as long as the euro stayed in a $1.20 to $1.30 band, it was okay.

"There's definitely concern that a break above $1.30 would not be good for euro zone growth, which is export-led," said Kamal Sharma, currency strategist at Bank of America.

French Finance Minister Thierry Breton, Luxembourg's Jean-Claude Juncker and Spanish Economy Minister Pedro Solbes all indicated the euro was reaching the end of its tolerance level, after it hit 1-year highs near $1.30 on Monday.


Elsewhere, the Australian dollar hit seven-week lows below US$0.74 after the Reserve Bank of Australia left interest rates unchanged at 5.75 percent, as expected.

The Reserve Bank of New Zealand is expected to leave rates unchanged at 7.25 percent when it makes its policy decision at 2100 GMT.

For further clues on the path of U.S. interest rates, the market was waiting to hear speeches later in the day from Fed Governor Mark Olson and especially Atlanta Fed President Jack Guynn, who will speak on the economic outlook and housing market.

© Reuters 2006. All Rights Reserved.


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