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Monday June 19, 2006 - 21:01:43 GMT
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FOREX-Dollar rallies as more Fed rate rises eyed

FOREX-Dollar rallies as more Fed rate rises eyed
Mon Jun 19, 2006 4:52pm ET8

(Recasts, updates prices)

By David McMahon

NEW YORK, June 19 (Reuters) - The dollar climbed across the board on Monday, buoyed by expectations that the Federal Reserve will keep raising interest rates to quash the risk of higher inflation.

With little major U.S. economic data due this week and many market players with one eye glued to World Cup matches on television, traders said activity was thin.

The dollar built on solid gains already made this month, touching a six-week high against the Swiss franc, supported by a widespread view that the Fed will raise interest rates at its June 28-29 meeting and maybe again in August.

Recent data suggesting that inflationary pressures are building and a string of hawkish comments from Fed officials have heightened expectations that the dollar's interest rate advantage over major currencies will improve.

"Interest rate differentials are moving more in favor of the dollar and that's giving it a little bit of support," said John McCarthy, director of foreign exchange trading at ING Capital Markets.

Late afternoon in New York, the euro was down around 0.5 percent on the day at $1.2580 , while sterling was also down half a percent at $1.8410 . The dollar rose 0.7 percent against the Swiss franc to 1.2400 francs , and 0.2 percent against the Japanese currency to 115.40 yen , having hit an eight-week high earlier in the day of 115.78.

Against the yen, the euro was down 0.3 percent at 145.20 yen , retreating from a peak of 145.86, the strongest since the single currency was launched in 1999.


Earlier, the yen fell to eight-year troughs against sterling and the Swiss franc on concern about a North Korean missile test and worries about the future of Bank of Japan Governor Toshihiko Fukui.

But the yen sharply reversed those losses in the New York session to be up on the day against most major currencies other than the dollar. Some traders were baffled by the turnaround.

"It's really volatile out there," said one trader at a Japanese bank in New York. "People are finding it very hard to judge the trend ... most of us are getting killed."

U.S. officials said Japan's neighbor North Korea appeared to have completed fueling for a test of a long-range ballistic missile that could possibly reach as far as Alaska.

The yen has also suffered from a furor over BOJ head Fukui's investment with a disgraced fund manager accused of insider trading. Some analysts have said that any escalation of the scandal could even delay the timing of the BOJ's first rate rise in six years, which is widely expected in July or August.

With little U.S. economic data this week apart from May housing starts and durable goods orders, analysts said the market's focus was squarely on the upcoming Fed meeting.

The Fed is seen certain to lift rates for a 17th straight time to 5.25 percent at the end of June, but attention has shifted to whether it is worried enough about inflation to hike again in August, even at the risk of slowing economic growth.

Atlanta Fed chief Jack Guynn said on Monday that U.S. core inflation had moved up to or beyond the level he considered acceptable over time.

UBS strategists expect the Fed to raise in both June and August, but wrote in a note to clients on Monday that unlike in 2005, when a string of rate hikes helped the dollar post its first gain in four years, this time the currency may struggle.

"We expect the current environment where rate hikes are seen as a threat to growth as less dollar-supportive," UBS said.

(Additional reporting by Nick Olivari)

© Reuters 2006. All Rights Reserved.


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