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Thursday October 12, 2006 - 10:33:40 GMT
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Dollar reverses post-Fed gains, awaits data

Dollar reverses post-Fed gains, awaits data
Thu Oct 12, 2006 6:25am ET139

(Updates price, adds quotes, changes byline)

By Veronica Brown

LONDON, Oct 12 (Reuters) - The dollar fell from this week's 2-1/2 month high against an index of currencies on Thursday, erasing gains made after minutes from the Federal Reserve's last policy meeting dented expectations for an interest rate cut. Wednesday's release of the minutes to the Fed's September meeting were hawkish, with policymakers remaining "quite concerned" about inflation risks and renewed their commitment to control inflation pressures.

But traders and analysts said there was a feeling that the dollar's rally over the past week -- kick-started by major upward revisions to non-farm payrolls data -- had been overdone.

Investors were also cautious ahead of the Beige Book report on regional economic conditions and U.S. trade data later on Thursday, as well as speeches from several European Central Bank policymakers, who could accelerate expectations for euro zone rate hikes.

"With money markets pricing out...expectations for Fed easing, but there's no room at this point to start expecting higher rates," Tullett Prebon G7 economist Lena Komileva said.

"This may be a good time, ahead of today's trade data, for a pause to the market," she added.

Some analysts say the U.S. economy still looks set to slow down and an interest rate cut was likely later next year.

"I still think a rate cut is on the cards next year, though unlikely in the next few months... The ECB policymakers may come out hawkish and that might temper the dollar reaction," said Mitul Kotecha, head of foreign exchange research at Calyon.

By 1005 GMT, the euro was up a quarter percent on the day at $1.2544 , having fallen to a 2-1/2 month low of $1.2500 on Wednesday. Analysts said the dollar's failure to break $1.2460 resistance also prompted profit taking.

The dollar was down 0.2 percent at 119.49 , having hit a 10-month high of 119.83 on Wednesday.

The euro was steady at 149.88 yen , nearly one yen off the record high set in August.

The Australian dollar was the biggest gainer, rising 0.8 percent at US$0.7481 following domestic jobs data that easily beat forecasts and boosted expectations the Australian central bank could raise interest rates again later this year.


The dollar had drawn support from comments by Richmond Fed President Jeffrey Lacker, who said on Wednesday that the central bank has to be "quite vigilant" to ensure inflation does not stay elevated.

Lacker was the sole member of the Fed's policy board to seek higher rates at its last two meetings.

A slowing U.S. economy and expectations inflation pressures could moderate were behind the Fed keeping rates on hold since hiking them to 5.25 percent in June. But over the past week the market has been rethinking a rate cut possibility.

"We've had a decent move over the past week and its been partly connected to a correction of some of the rate expectations that have been forming in the U.S.," said Ian Gunner, head of FX research at Mellon Bank.

The market will also be eager to see the U.S. trade readings for August, due at 1230 GMT. Economists expect the data to show the deficit shrunk to $66.7 billion from $68.0 billion in July.

ECB President Jean-Claude Trichet and Governing Council member Axel Weber are giving a news conference in Dresden later.

ECB Governing Council members Mario Draghi and Yves Mersch, as well as Executive Board member Juergen Stark also speak at separate events later.

The ECB raised interest rates to 3.25 percent earlier this month and cemented expectations for another rate hike this year.

Governing Council member Nout Wellink said the ECB should continue to raise interest rates in the period ahead given inflationary risks.

© Reuters 2006. All Rights Reserved


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