Tuesday August 22, 2006 - 21:30:02 GMT
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Reuters - www.reuters.com
FOREX-Dollar gains broadly on data, rate outlook
By Steven C. Johnson
NEW YORK, Aug 22 (Reuters) - The dollar gained against major currencies on Tuesday, boosted by weak German economic data and a Federal Reserve official who said more U.S. interest rate hikes may be needed to ward off inflation.
Analysts said both helped propel a round of profit-taking that began after the euro failed to hold above Monday's two-month high at $1.2939, forcing investors to cover short dollar positions -- bets the greenback would fall further.
"Primarily, the story is one of euro liquidation, and the data gave the market another excuse" to buy dollars, said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.
The euro was down about 0.7 percent at $1.2798 , more than a cent off Monday's two-month high and near a session trough of $1.2785. The dollar was up 0.6 percent at 116.54 yen .
The dollar also climbed 0.8 percent to 1.2345 Swiss francs , while sterling was down 0.3 percent at $1.8876 .
Euro selling accelerated after the ZEW economic research institute said its economic expectations indicator for Germany came in at a five-year low after seven successive months of decline.
The dollar extended its advance after the Chicago Fed president, Michael Moskow, said more interest rate hikes may be needed to keep prices in check.
"The risk of inflation remaining too high is greater than the risk of growth being too low," he said.
The Fed ended a string of 17 consecutive interest rate hikes earlier this month when it kept the fed funds rate steady at 5.25 percent, noting that slower U.S. growth would help moderate price pressures.
The central bank did not give any clear signals that the pause amounted to the end of a tightening campaign that began in June 2004, when borrowing costs stood at just 1 percent.
ECB OUTLOOK, HOUSING DATA DUE
Still, analysts said markets expected the European Central Bank to raise interest rates later this year from the current 3 percent.
In an interview with Reuters on Tuesday, ECB Governing Council Member Axel Weber said the ZEW indicator was just one economic measure among many. He added that the central bank would keep lifting rates as long as euro-zone growth prospects and price risks continue to rise.
Fed funds futures were pricing in less than a one-in-five chance that the Fed would raise rates in September, suggesting the dollar would soon unwind Tuesday's rally.
With the Fed on hold and the United States in need of heavy capital inflows to finance its large current account deficit, analysts at UBS said they expect market attention to "increasingly revert to external imbalances," prompting investors to diversify away from dollar-denominated assets.
Another possible source of dollar weakness may be Wednesday's report on July existing home sales, expected to decline amid rising mortgage rates.
"Housing data has disappointed markets of late and it could very easily happen again," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
Signs that the U.S. housing sector, the main engine of recent U.S. growth, is cooling rapidly have led some economists to predict the Fed could cut rates in the second half of 2007.
(Additional reporting by Nick Olivari)
Â© Reuters 2006. All rights reserved.
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