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Wednesday June 28, 2006 - 10:41:02 GMT
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FOREX-Dollar firm as Fed rate decision, statement loom

FOREX-Dollar firm as Fed rate decision, statement loom
Wed Jun 28, 2006 6:15am ET13

(Updates price, adds quotes, changes dateline, byline)

By Natsuko Waki

LONDON, June 28 (Reuters) - The dollar edged higher across the board on Wednesday as investors awaited signals from the Federal Reserve on further interest rate hikes which may accompany a rise widely anticipated for later this week.

The Fed is widely seen lifting overnight rates for a 17th straight time on Thursday to 5.25 percent from 5 percent, but the focus is on what the central bank signals about its next meeting in August.

Expectations for higher interest rates in the United States and elsewhere have triggered massive unwinding of carry trades or investment in emerging assets in recent weeks and raised concerns about the negative impact on growth from tightening.

"The market is reluctant to seek new positions ahead of the FOMC. We know they would raise rates but the market wants to see what kind of balance they would strike," said Daragh Maher, currency strategist at Calyon.

"We've seen a pick-up in core inflation and expectations for a moderation in growth. If one overshadows the other it will give indication for August (rate decision)."

By 0950 GMT, the dollar was hovering near a two-month high versus the yen at 116.36 . The euro was down 0.15 percent at $1.2564 and steady versus the yen at 146.24 yen .

The single currency climbed as high as 146.65 yen on Tuesday -- its strongest since it was first launched in 1999.

The Swiss franc hit the day's high against the euro after the closely-watched Swiss KOF leading indicator of business sentiment came in higher-than-expected, underpinning expectations for higher Swiss interest rates.


European Central Bank officials also kept up their hawkish rhetoric on fighting price pressures on Wednesday.

Governing Council member Nicholas Garganas said further interest rate increases are expected. Axel Weber was quoted as saying the ECB was ready to act swiftly to counter inflationary risks.

"They have been hawkish but it does seem there has been a step-up in the level," Maher said.

Investors are betting that the ECB will step up the pace of monetary tightening after policymakers' comments and surprisingly strong confidence data.

Money markets are pricing in a 50 percent chance that the ECB will raise interest rates at its August 3 meeting, having priced in only a 20 percent chance two weeks ago.

The ECB has raised borrowing costs three times since December, bringing them to 2.75 percent earlier this month.

Investors will watch for more hawkish comments from ECB Governing Council member Yves Mersch, who is due to speak on monetary policy at 1400 GMT. Mersch said this week the ECB has not ruled out more aggressive credit tightening.


At its last meeting in May, the Fed said that some further policy tightening may yet be needed to stem inflationary pressures but such action would depend on the economic outlook.

In recent weeks Fed officials have expressed worries that inflation has heated up too much, stoking expectations for another rate increase in August to 5.5 percent that would help the dollar maintain its yield advantage.

Elsewhere, the New Zealand dollar fell to a two-year low of US$0.5945 after New Zealand unexpectedly posted a trade deficit for the first time in three months in May.

"With transition to a softer global demand environment an almost explicit central bank objective, the outlook for commodity linked currencies is fraught with risk," HBOS Treasury Services said in a note to clients.


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