Thursday September 21, 2006 - 10:19:11 GMT
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Reuters - www.reuters.com
FOREX-Dollar falls broadly after Fed statement
FOREX-Dollar falls broadly after Fed statement
Thu Sep 21, 2006 6:06am ET144
(Updates prices, adds quotes, changes byline)
By Veronica Brown
LONDON, Sept 21 (Reuters) - The dollar fell broadly on Thursday after the Federal Reserve left interest rates on hold for a second straight policy meeting and suggested inflation risks were moderating.
As widely expected, the Fed voted to keep its overnight funds rate at 5.25 percent, the level reached in June after increases at 17 straight meetings stretching over two years.
The Fed noted several reasons to expect inflationary pressures to "moderate over time" but made clear this was a forecast and not yet reality, holding out the possibility of higher rates if needed.
"I guess that if you are looking at overall Fed policy risk going forward and you are looking at the potential for a rate cut or at least no more rate hikes -- then you could take some comfort from them re-affirming this moderation story," Mellon Bank head of foreign exchange research Ian Gunner said.
By 0952 GMT, the dollar had fallen 0.3 pct on the day against the yen to 117.04 yen . The euro rose around a third of a percent to the week's high of $1.2734 , but was flat against the yen at 148.98 .
Sterling rose to a 10-month high agaist the euro as markets continued to gear up for a UK interest rate hike in November to 5.00 percent.
Investment flows out of the euro zone totalled 6.7 billion euros in July, the European Central Bank said on Thursday.
ALL ABOUT RATES
Moves in the Fed funds futures markets after the decision pointed to just a 6 percent chance of a quarter percentage point rise at the U.S. central bank's next meeting in October.
By contrast, ECB officials have kept up their talk of being vigilant in tightening credit enough to keep inflation pressures contained.
The key rate in the euro zone is at 3 percent and market expectations are for the ECB to raise that to at least 3.5 percent by mid-2007, while the Bank of Japan is seen raising rates by 25 basis points from 0.25 percent only early next year.
Bank of Japan Governor Toshihiko Fukui said on Thursday the central bank would adjust rates slowly by examining economic and price developments, and that the Japanese economy continued to recover gradually.
Comments by Japan's finance minister and European officials after the Group of Seven meeting last weekend seemed to back a stronger yen, by saying the currency should reflect Japan's solid economic recovery.
Short-covering following further European policymaker comments after the meeting helped to pull the yen away from near a lifetime low against the euro and a five-month trough versus the dollar.
The yen may get a further boost if German Finance Minister Peer Steinbrueck makes similar comments when he takes part in a discussion organised by the state of Hesse at 1300 GMT.
But some in the market say the improved fortunes of the low-yielding yen aren't likely to last.
"The BOJ is remaining very cautious, and the interest rate differential is a key driver for euro/yen," said Derek Halpenny, currency economist at BTM-UFJ.
With rates remaining the dominant theme in the market, investors have widely sold low-yielding currencies in favour of those offering higher yields in the carry trade.
Meanwhile, China's central bank chief Zhou Xiaochuan said China would gradually push to allow its currency to be freely converted and step up efforts to improve the openness of its financial sector.
But he added Beijing had no timetable for widening the daily trading band of the yuan , which set a post-revaluation high against the dollar for a third straight day on Thursday.
Zhou and ECB Governing Governing Council member Christian Noyer preside over a Sino-French financial forum later on Thursday.
Â© Reuters 2006. All Rights Reserved.
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