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Friday June 23, 2006 - 10:33:45 GMT
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FOREX-Dollar rallies to two month highs, Fed eyed

FOREX-Dollar rallies to two month highs, Fed eyed
Fri Jun 23, 2006 6:12am ET14

(updates prices, adds details, changes byline)

By Toni Vorobyova

LONDON, June 23 (Reuters) - The dollar rallied to two-month highs against an index of currencies on Friday, boosted by expectations for more U.S. rate hikes and by inflows of cash from investors keen to get out of falling emerging markets.

The yen fell to a two-month low against the U.S. currency for the second day in a row as investors become less sure whether the Bank of Japan will raise interest rates from virtually zero as soon as next month.

The dollar was buoyed on Thursday by rumours that Fed officials, possibly including Chairman Ben Bernanke, had met with bond market participants on Wednesday.

That fanned speculation the Fed might raise rates by half a percentage point next week, although most traders were sceptical and stuck to forecasts for a quarter point rise to 5.25 percent.

Expectations of another rate hike in August have also risen, with U.S. short-term rate futures on Thursday pricing in as much as a 90 percent chance of such a move on Thursday.

"The focus is on the FOMC meeting next week ... We are at least going for a 25 basis point (hike) and there is some speculation that we could even get 50 basis point, or at least we'll get indication that the Fed could also hike again in August," said Niels From, currency strategist at DrKW in Frankfurt.

"So of course that is supporting the dollar," he added.

By 0954 GMT the dollar rose to a two-month high against an index of currencies <=USD> 86.68.

It hit a two-month high against the Swiss franc at 1.2475 francs. The Swiss currency failed to gain support from data showing a rise in producer and import prices in May.

The euro fell a quarter of a percent on the day to $1.2542 about 15 ticks away from a two-month low.


The yen fell as low as 116.39 per dollar on increased uncertainty over the timing of the first BOJ rate hike.

"A July hike had been fully priced in. Now there are risks associated with that, that's why the yen is underperforming," said Steven Saywell, currency strategist at Citigroup.

Bank of Japan Governor Toshihiko Fukui is in trouble over a scandal over his investment years ago in an equity fund run by a financier indicted on Friday on suspicion of insider trading.

Although Prime Minister Junichiro Koizumi and ministers have strongly backed the BOJ chief the yen has come under pressure this week from persistent speculation that Fukui may resign and talk that this could delay the timing of BOJ rate hikes.

Earlier, the yen hit session highs on market talk that China would announce new currency measures but reversed when the People's Bank of China said a statement would not be related to the yuan , focussing instead on global finance.

"It's a Friday and the market is a bit nervous," said a trader at a UK bank.


Elsewhere, the New Zealand dollar hit 11-week lows at US$0.6054 , remaining under pressure after data on Thursday showed New Zealand's annual current account deficit ballooned to a wider-than-expected record level of NZ$14.54 billion -- or 9.3 percent of GDP -- in the first quarter.

The Australian dollar also weakened to a two-month low against the U.S. currency . Currencies in commodity-rich countries such as Australia are seen as most vulnerable to a slowdown in the global economy.

The sell off in emerging markets continued, with the Turkish lira falling to its lowest levels in more than three years against the dollar and the Hungarian forint falling to a record trough versus the euro .

The dollar benefited as investors scrambled to get out of the falling markets.

"What we've seen in the past weeks -- emerging markets coming under pressure -- somehow it was more of a positive factor for the dollar than for the euro," said DrKW's From.

"Perhaps that's because the major part of investors out there are dollar accounts, so when they take risks back, they tend to go back in the dollar again."

In the absence of any major euro zone data, investors were looking ahead to U.S. durable goods orders for May at 1230 GMT. Orders are expected to rise 0.5 percent compared with a 4.4 percent drop in April. A strong reading is seen further supporting Fed rate hike expectations.

© Reuters 2006. All Rights Reserved.


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