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Saturday December 23, 2006 - 00:52:25 GMT
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FOREX-Dollar rises as technicals outweigh US inflation data

FOREX-Dollar rises as technicals outweigh US inflation data
Fri Dec 22, 2006 3:03pm ET30

(Updates prices, adds comment)

By Steven C. Johnson

NEW YORK, Dec 22 (Reuters) - The dollar gained broadly on Friday, hitting two-month highs against the yen and shrugging off tame inflation data as traders focused on key technical levels in a thin, pre-holiday session.

The greenback fell briefly after a report showed core U.S. prices, excluding food and energy costs, held steady last month. That data bolstered the view the Federal Reserve may have to cut interest rates in early 2007 to counter slowing economic growth.

But a better-than-expected reading on U.S. consumer sentiment in December gave the market reason to buy dollars by midmorning.

Traders also made a run for key stop losses in dollar/yen at the 118.55-60 yen level, accelerating the dollar's rise. The dollar rose to 118.97 yen , its highest level since late October, before trading back down to 118.76 yen, still up 0.4 percent on the day.

"In thin markets, key technical levels usually trigger big moves," said Brian Dolan, director of FX research at in Bedminster, New Jersey.

He also added that U.S. economic data on Friday were mostly supportive of the dollar, citing a generally positive University of Michigan consumer sentiment. See [ID:nN22266289].

With activity expected to wind up early ahead of the Christmas holiday and liquidity already quite thin, traders said the dollar's subsequent rally had more to do with position-squaring than the market's outlook for U.S. growth.

"This is not signaling a new, fundamental move higher in the dollar," said Ashraf Laidi, chief FX analyst at CMC Markets in New York. "When you see short-lived selling followed by quick gains, that's not the market moving on fundamentals."

But he said dollar selling may resume next year as the market absorbs several recent reports showing benign inflation pressures coupled with data on Thursday showing a sharp fall in mid-Atlantic area manufacturing activity.

The yen, meanwhile, continued to be under pressure as investors continued to use the low-yielding Japanese currency to finance purchases of assets denominated in higher-yielding currencies, a key theme in the currency markets in 2006.

The Bank of Japan held interest rates steady at 0.25 percent earlier this week, and expectations for a move in January have receded.

"All other things being equal, people just want to sell the yen and buy other currencies," said John McCarthy, vice president of FX at ING Capital Markets in New York..

The euro was up 0.1 percent at 156.03 yen , not far from a record high at 156.42 yen. Against the dollar, the euro fell 0.3 percent to $1.3136 .

Expectations for a rate rise in the euro zone by March have helped spreads between euro zone and yen money market rates to widen by almost 20 basis points in the past few weeks to their widest gap in three years.

While most high-yielding currencies have enjoyed the upper hand this year, a few have come under heavy pressure.

The Icelandic crown tumbled to a five-month low versus the euro on Friday and a one-month trough versus the dollar after Standard & Poor's downgraded Iceland's sovereign debt rating.

Hungary's forint also fell against the euro after Moody's rating agency downgraded the country's credit rating to A2 from A1.

Like Iceland, Hungary has high interest rates to fend off inflation, though similarly high deficits make some investors wary of its growth potential.

© Reuters 2006. All Rights Reserved


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