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Monday October 23, 2006 - 10:58:50 GMT
Reuters - www.reuters.com

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FOREX-Dollar rallies vs majors, aided by falling oil

FOREX-Dollar rallies vs majors, aided by falling oil
Mon Oct 23, 2006 6:43am ET147

(changes byline, adds quotes updates prices)

By Veronica Brown

LONDON, Oct 23 (Reuters) - The dollar strengthened against major currencies on Monday, recouping some of last week's losses as investors positioned ahead of this week's Federal Reserve interest rate decision. The dollar's revival was helped in part by falling oil prices, which could lead to an improvement in the U.S. trade deficit, analysts said.

A slight widening in spreads in the dollar's favour, amid a broader rise in global short-end interest rates, also helped support the U.S. currency early on Monday.

It remained stuck in familiar ranges however, with a dearth of major economic indicators ahead of the Federal Open Market Committee's decision and more widely-anticipated statement dampening enthusiasm for taking large positions.

"The ongoing declines in oil prices are dollar-positive for a myriad of reasons and there's a small sell off in U.S. interest rate futures at the front end...you could link that to people reassessing what they think of the Fed or the data this week," HBOS chief currency strategist Steve Pearson said.

The Fed is widely expected to hold rates at 5.25 percent for the third straight time at the end of its two-day meeting on Wednesday and repeat warnings on inflation.

But with growth slowing as data shows some signs of inflation easing, many traders think the Fed may be done with raising rates.

At 1029 GMT, the euro was down 0.5 percent from late New York levels on Friday at $1.2547 , while sterling was off 0.6 percent at $1.8722

The dollar was up 0.4 percent at 119.20 yen , and 0.6 percent higher against the Swiss franc at 1.2663 francs .

FED TO RAISE OR CUT NEXT?

The euro rallied last week after traders failed to push it below key support around $1.2465. But talk of an options barrier up at $1.2650 has served as decent resistance, according to currency strategists at RBC Capital Markets.

Oil prices fell sharply on Monday, despite confirmation leading exporter Saudi Arabia was curbing November supplies after an OPEC agreement to cut output.

Meanwhile, on the interest rate front, a Reuters poll published last week showed that 14 out of 21 U.S. primary bond dealers said the Fed's next move would be to cut rates, although views were split on the timing of such a move.

The remaining seven believe the U.S. economy will rebound from a third quarter slowdown and generate enough inflation pressures to persuade the Fed to push rates higher.

Globally, traders are pricing in higher interest rates in other key economic regions as strength in equity markets dull the allure of safer-haven bonds.

Benchmark yields on 10-year Japanese Government Bonds hit a two-month high of 1.84 percent, as did 10-year euro zone bond yields, at 3.885 percent. But these moves up in yields do not appear to be lifting their respective currencies, with positioning and technical factors exerting more influence on the market early on Monday.

Elsewhere, the Saudi Arabian riyal soared to a 5-1/2 month high against the dollar as talk swirled around the market of an imminent revaluation.

There has been no official comment, but traders said illiquid markets owing to the Muslim Eid holidays exacerbated the move.

"Oil importers are out of the market, making any downside move (in dollar/riyal) look more significant than it is," said a trader in London.

© Reuters 2006. All Rights Reserved.

 

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