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Thursday June 15, 2006 - 10:27:12 GMT
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FOREX-Dollar steady as Fed rate rise priced in

FOREX-Dollar steady as Fed rate rise priced in
Thu Jun 15, 2006 5:43am ET7
(Updates price, adds quotes, changes byline)

By Natsuko Waki

LONDON, June 15 (Reuters) - The dollar held steady against major currencies on Thursday, with the prospect of further U.S. monetary tightening that has fuelled the U.S. currency's recent rally now largely factored in by investors.

The dollar failed to gain a lasting boost on Wednesday from data showing higher-than-expected core U.S. consumer inflation in May, with investors unanimously expecting the Federal Reserve would raise interest rates in June and some talking about an additional rate rise in August.

"Price action we saw yesterday was more to do with the fact that bad inflation news has been priced in already," Adarsh Sinha, currency strategist at Barclays Capital.

"An unfavourable inflation picture is bad for the dollar. As the Fed raises rates, it risks growth moderating sharply."

By 0930 GMT, the euro was little changed on the day against the dollar at $1.2611 , above Tuesday's 1-1/2 month low of $1.2528.

The yen gained some support as China's yuan rose beyond the psychologically key 8.00 yuan per dollar level to as high as 7.9980 per dollar , its strongest level since mid-May.

A record-high Chinese trade surplus in May has fuelled some speculation that the central bank could allow a stronger yuan, particularly ahead of a summit of leaders from the Group of Eight industrialised nations next month.

The dollar was down 0.1 percent at 114.90 yen and the euro traded steady at 144.95 yen .

The Swiss franc held steady against the euro and the dollar after the Swiss National Bank raised rates as expected by a quarter percentage point and said it will continue to raise rates as the economy expands.

Final euro zone inflation rose 0.3 percent on the month and 2.5 percent on the year in May, in line with expectations.


Expectations for rising interest rates helped the dollar pull up from a one-year low against the euro at the start of the month and an 8-month trough versus the yen in May, but the rally is losing steam.

"Markets have 100 percent priced in a June rate hike and a 60 percent chance of a August rate hike so the potential for the dollar to get more support is not that great," said Tony Norfield, head of foreign exchange research at ABN AMRO.

"Higher U.S. rates will be less supportive for the dollar if everybody else is tightening,"

Global trade imbalances could also haunt the dollar and traders were awaiting U.S. capital flows data for April due at 1300 GMT to see if inflows from foreign investors covered the country's current account shortfall in that month. Continued...

The widening U.S. trade deficit has nagged the dollar for years, and calls in April from officials of the Group of Seven economic powers for currencies of emerging Asian nations to rise to help correct imbalances triggered a sell-off in the dollar.

A Reuters poll shows net capital inflows of $67.5 billion.


In Japan, the BOJ kept monetary policy unchanged as expected at the end of a two-day meeting on Thursday.

Most in the market expect the central bank to raise rates for the first time in six years in July, but a nearly 20 percent fall in the Nikkei stock average since April has raised some concerns that the BOJ could delay a move.

BOJ Governor Toshihiko Fukui apologised in parliament for the storm caused by his investment in a fund whose manager has been arrested for suspected insider trading.

Fukui also said he wanted to continue in his post as the central bank's governor, adding that he saw no effect on the BOJ's board thinking on monetary policy from the issue involving his investment in a fund set up by high profile fund manager Yoshiaki Murakmi.

The Reuters Tankan on Thursday produced a diffusion index of plus 39 in June, a record high indicating that business confidence among Japanese manufacturers continues to improve despite a steep fall in Japanese share prices.

© Reuters 2006. All Rights Reserved.


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