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Thursday August 17, 2006 - 20:41:37 GMT
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FOREX-Dollar gains on short covering after Philly Fed data

FOREX-Dollar gains on short covering after Philly Fed data
Thu Aug 17, 2006 4:05pm ET169

(Recasts, adds comment, adds details of Dalls Fed official, updates prices)

By Nick Olivari

NEW YORK, Aug 17 (Reuters) - The U.S. dollar recovered some ground on Thursday, reversing two days of declines, with stronger-than-expected economic data forcing some investors to buy the currency back after selling it short following tame inflation data earlier this week.

The dollar rose after the Philadelphia Federal Reserve Bank said its index of business conditions in the U.S. Mid-Atlantic region climbed in August to the highest level in more than a year. For details, see [nN17279364].

"I solely believe (trading) is technical at this point and the market bailing on short dollar positions," said Joe Francomano, vice president of FX at Erste Bank in New York.

A short position is a bet a currency or security will fall.

Around 3.45 p.m. EDT ( 19:45 GMT) the euro was down 0.1 percent on the day at $1.2827 . It was well down from the $1.2870 where it changed hands before the release of the Philly Fed survey, though still within a cent of the two-month peak of $1.2913, according to EBS data, reached last week.

The dollar was up 0.1 percent at 115.94 yen , and up 0.3 percent against the Swiss franc at 1.2325 francs .

Traders had said there was a chance of a short-term rebound in the dollar since market positioning was already heavily skewed against the greenback but in favor of other currencies such as the euro and sterling. Erste Bank's Francomano described the pre-Philly Fed positioning against the dollar as "extreme"

"All people are focused on is data," said Brian Taylor, chief foreign exchange dealer with Manufacturers and Traders Bank in Buffalo, New York. "After the Philly Fed the dollar gained but that was more a short squeeze."

Benign readings of U.S. consumer and producer price inflation, as well as signs that the U.S. housing market is slowing, and the economy is losing momentum had driven the dollar lower for most of this week.

A slowing economy would prompt the Fed to keep rates steady, analysts said, even as other central banks such as the European Central Bank may continue raising rates.

Even with the enexpectedly robust Philly Fed data however, Fed funds futures on the Chicago Board of Trade still showed investors pricing in just an 18 percent chance that the Fed will raise interest rates at its next meeting in September.

Last week the market was pricing in almost an even money chance at one point.

The Fed left rates on hold at 5.25 percent last month after raising its funds rate at 17 straight meetings since June 2004.

Analysts said on Thursday that the dollar's gains on the Philly Fed report were likely to be limited.

"The prices paid component showed an alleviation of price pressures, so that is going to limit the dollar's upside potential and will therefore do nothing to change the market's more dovish outlook for the Fed," said Alex Beuzelin, senior market analyst at Ruesch International in Washington, D.C.

Investors shrugged off comments from Dallas Fed President Richard Fisher, a non-voting member of the Federal Open Market Committee which sets policy

Fisher told a community lunch in Shreveport, Louisiana the Fed's next move on interest rates is not pre-ordained but will depend on incoming economic data though the central bank will not tolerate high levels of inflation.

Sterling was down 0.6 percent at $1.8841 , under pressure after British retail sales unexpectedly fell in July, adding to losses from Wednesday when minutes released of the Bank of England's last rate-setting meeting suggested the bank was in no hurry to repeat this month's surprise rate hike to 4.75 percent.

© Reuters 2006. All Rights Reserved.


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