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Tuesday June 13, 2006 - 13:02:31 GMT
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FOREX-Dollar helped by US rate view, safe haven flows

FOREX-Dollar helped by US rate view, safe haven flows
Tue Jun 13, 2006 6:19am ET14
(Updates prices, adds quotes, changes byline)

By Carolyn Cohn

LONDON, June 13 (Reuters) - The dollar hit a one-month high against the euro and a six-week peak versus the yen on Tuesday as investors favoured U.S. assets over riskier ones, in view of the likelihood of a Federal Reserve interest rate hike.

More Fed officials talked tough on fighting inflation this week, increasing expectations of a U.S. rate hike later this month.

A global sell-off in equities, commodities and emerging markets also boosted the greenback, and the euro took a further knock from a weak reading in Germany's closely-watched ZEW indicator for June.

"What has really been driving the currency markets has been the changed view on the Fed," said Niels From, currency strategist at Dresdner Kleinwort Wasserstein in Frankfurt.

"We are seeing a continued rise in risk aversion, and the ZEW was not really supportive for the euro."

The euro hit a one-month low of $1.2558 in Tokyo trade, but steadied at $1.2590 by 0954 GMT.

The dollar also hit a six-week high against the yen at 114.77 yen , before easing to 114.10 yen, steady from the U.S. close.

Markets are awaiting more clues on U.S. inflation from May producer prices data at 1230 GMT, with core PPI expected to have risen 0.2 percent on the month. Consumer prices data on Wednesday will also be key. At 1500 GMT Fed chairman Ben Bernanke gives a talk on consumer issues and will take questions from the audience, the second of three public events he will take part in this week.


Cleveland Fed President Sandra Pianalto said on Monday that current core consumer prices exceeded her "comfort level" if sustained, driving home the message that the Fed will keep raising rates if necessary to contain inflationary pressures.

Dallas Fed President Richard Fisher said the central bank was experiencing "some angst" over inflation.

A number of Fed officials -- including Bernanke last week -- have expressed similar sentiments, convincing investors that the Fed will lift rates for a 17th straight time to 5.25 percent at its meeting ending on June 29.

But the prospect of both higher U.S. short-term rates and a potential slowdown in the world's largest economy have rattled markets, sparking sell-offs in assets that prosper from strong global growth: stocks, commodities and emerging markets.

Gold prices slid below $600 an ounce for the first time in two months, the cost of copper hit a seven-week low and Japan's Nikkei share average had its biggest one-day percentage loss in two years, tumbling 4.14 percent. "The weakness we are seeing in risky assets right now is slightly positive for the dollar across the board, including against the yen," said Adarsh Sinha, currency strategist at Barclays Capital.

The sell-off in commodities and in the Nikkei also sparked a fall in the Australian and New Zealand dollars , with both shedding around one percent on the day against the U.S. currency.


In the euro zone, the German ZEW economic sentiment indicator gave a reading of 37.8 in June, below the forecast 45 and 50.0 in May.

"It's much weaker than expected. There is a real chance that the euro can get to $1.25 overnight. ECB rate expectations might be a bit too high and any dent in ECB rate expectations will undermine the euro," said Adam Myers, currency strategist at UBS.

The euro has been under pressure since the ECB last Thursday raised rates by 25 basis points to 2.75 percent -- less than some people had expected -- and signalled it was not planning to step up the pace of its current once-a-quarter monetary tightening.

Meanwhile, Japanese traders brushed off news that in the late 1990s Bank of Japan Governor Toshihiko Fukui had invested 10 million yen ($87,390) with fund manager Yoshiaki Murakami, who was arrested last week for insider trading.

© Reuters 2006. All Rights Reserved.


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