Sunday July 16, 2006 - 23:30:16 GMT
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Reuters - www.reuters.com
FOREX-Dollar supported as Mideast violence escalates
SYDNEY, July 17 (Reuters) - The U.S. dollar extended its gains against the yen and euro on Monday as the intensifying conflict in the Middle East drove investors toward the perceived safety of the world's most liquid currency.
The dollar climbed to a two-week high on the yen at 116.38 yen and threatened June's peaks around 116.70, though volumes were light with Japanese markets closed for a public holiday.
The yen was also weighed down by speculation the Bank of Japan would only tighten policy at a glacial pace. The central bank ended its zero rate policy last week for the first time in six years.
"Yen weakness has been a major feature of markets in recent days," said Tony Morriss, a senior currency strategist at ANZ Investment Bank. "There has been little support from Friday's rate hike as the BOJ will move cautiously in coming months."
The euro eased a little further to 1.2633 per dollar, having been as high as 1.2860 a week previously before the latest flare-up in global tensions.
"The escalation of violence in the Middle East over the weekend should continue to see the U.S. dollar supported as the week gets underway," added Morriss.
Guerrilla group Hizbollah killed eight people in the Israeli city of Haifa on Sunday in its deadliest rocket attack on the Jewish state, and Israeli planes killed 41 people in Lebanon in a fifth day of strikes.
Israeli Prime Minister Ehud Olmert said Hizbollah's attack would have far-reaching consequences for Lebanon, while Israeli planes bombed the Palestinian foreign ministry and the port of Tripoli on Monday.
Investors have responded to the uncertainty by buying gold, oil and U.S. Treasuries, all of which are priced in U.S. dollars. The safe-haven bid helped the dollar overcome soft U.S. economic data on Friday, which seemed to lessen the chance of further rate hikes from the Federal Reserve.
The central bank's latest view should become clearer when Chairman Ben Bernanke testifies to the Senate Banking Committee on Wednesday.
The market will have to navigate the June consumer price report on Wednesday. Median forecasts are for a 0.2 percent gain in both the headline and core rate, but anything higher would rekindle talk of a tightening and tend to support the dollar.
Analysts at Citigroup see the core rate rising 0.3 percent, which would mark the largest advance in a four-month period since the four months ended April 1995.
Â© Reuters 2006. All Rights Reserved.
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