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Thursday October 26, 2006 - 10:35:45 GMT
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FOREX-Dollar drops broadly in post-Fed gloom

FOREX-Dollar drops broadly in post-Fed gloom
Thu Oct 26, 2006 6:17am ET148

(Updates prices, adds fresh quotes, changes byline)

By Carolyn Cohn

LONDON, Oct 26 (Reuters) - The dollar fell half a percent to three-week lows against the euro on Thursday after the U.S. Federal Reserve kept interest rates steady and left its policy statement largely unchanged, suggesting steady rates to come.

The euro got an extra boost, hitting two-month highs against the yen, from strong German consumer sentiment data and upbeat comments on inflation from European Central Bank President Jean-Claude Trichet.

The U.S. central bank kept the key overnight rate at 5.25 percent as expected for a third straight meeting on Wednesday, predicting moderate economic growth ahead with some reason to expect easing price pressures. That triggered a pull-back in the dollar as some traders had been expecting the Fed to take a tougher stance.

"The statement has been taken to be slightly dovish, and the dollar has come off a little bit in each session -- U.S., Asia and London -- but the move is probably coming to an end soon," said Naeem Hasid, currency strategist at HBOS Treasury Services.

"In the euro, ECB governors have also been keeping up the hawkish tone."

All but one of 17 primary dealers in a Reuters poll taken shortly after the Fed's decision said they expect the central bank to hold rates at its next meeting. Eleven dealers expect the next rate move to be a cut, while four forecast a rise.

The euro was up 0.49 percent on the day against the dollar at $1.2662 by 0955 GMT, just off earlier three-week highs.

The single currency also rose against the low-yielding yen to 150.48 yen , its highest in nearly two months and close to a record high of 150.78 yen struck at the end of August. It later eased to 150.28, up a touch from the U.S. close.

The dollar fell 0.4 percent against the yen to three-day lows of 118.61 .


German consumer sentiment is set to rise for an 11th month to its highest level in five years in November, the GfK market research group said on Thursday.

Trichet said inflation risks in 2007 remained on the upside, and the ECB should remain vigilant in the area of ensuring low inflation.

Also on Thursday, ECB Executive Board member Lorenzo Bini Smaghi warned on ending rate hikes too soon. The ECB is expected to raise rates by a quarter point to 3.5 percent in December, and to 3.75 percent by mid-2007, according to a Reuters poll.

A number of other ECB officials and New York Fed President Timothy Geithner are scheduled to speak on Thursday.

The high-yielding New Zealand dollar fell after the country's central bank held interest rates at 7.25 percent late on Wednesday . A majority of analysts had expected a rise.


The Fed repeated that core inflation was elevated and that more credit tightening may be needed to keep price pressures contained, maintaining a bias towards raising rates further.

Some analysts honed in on the changed wording in the post-meeting statement that suggested the Fed felt most of a slowdown stemming from a weak housing sector was past.

Others concentrated on the omission of a reference to energy and commodity prices having the potential to sustain inflationary pressures.

"Everywhere you turned, people were talking about the Fed being far more hawkish, so in leaving their statement practically unchanged there is some disappointment in the market, putting the dollar under pressure," BNP Paribas senior currency strategist Ian Stannard said.

Analysts will focus on data including U.S. September durable goods at 1230 GMT and third quarter GDP figures on Friday, to see if they back up the Fed's reasoning.

© Reuters 2006. All Rights Reserved


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