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Monday March 26, 2007 - 10:21:43 GMT
Reuters - www.reuters.com

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FOREX NEWS-Dollar on firm footing as risk appetite picks up

FOREX-Dollar on firm footing as risk appetite picks up
Mon Mar 26, 2007 5:59am ET18

(Updates price, adds quotes, changes byline)

By Toni Vorobyova

LONDON, March 26 (Reuters) - The dollar ticked up against the yen and euro on Monday, consolidating gains made late last week as expectations faded for near-term U.S. interest rate cuts, and traders focused on upcoming U.S. housing data.

Stronger-than-expected existing home sales data on Friday helped to cool expectations the Federal Reserve will ease monetary policy in the next few months, and to inject a degree of risk-taking back into financial markets.

This eroded some of the market's dovish interpretation of the Fed's policy statement last Wednesday. It lifted the dollar and stocks, triggered profit-taking selling in the euro and weighed on bonds and rate futures as traders pared back their bets on two quarter-point rate cuts from the Fed this year.

New U.S. home sales for February is the main data release on Monday. But traders may be reluctant to move the dollar and other major currencies too much ahead of the data and Fed Chairman Ben Bernanke's congressional testimony on Wednesday.

"There is a lot of risk in the market still but it does seem at this moment in time that concerns about near-term Fed rate cuts may have been a bit over-excessive and that is feeding into FX market sentiment," said Kamal Sharma, currency strategist at Bank of America.

CARRY IS KING

By 0919 GMT, the euro was down 0.15 percent at $1.3262 , around one-week lows.

The dollar had gained 0.14 percent to 118.26 yen , as some investors re-entered carry trades, borrowing the Japanese unit to fund purchases of higher-yielders like the greenback.

The New Zealand dollar, which enjoys the highest interest rates in the industrialised world at 7.50 percent, rose 0.4 percent to $0.7128 and 0.7 percent versus the yen to one-month highs of 84.35 yen .

On Friday, the New Zealand dollar hit an intraday peak of $0.7158, its highest since November, 2005.

The Swiss franc, another favourite funding currency alongside the yen, hit two-week lows against the dollar on Monday.

"It's very much a return back to pre-existing trends that we saw before the volatility in FX markets. Carry is king and ... the higher yielding currencies are performing strongly relative to the low yielding currencies," said Sharma at Bank of America.

NEW HOMES

Data on Friday showed existing U.S. home sales jumped 3.9 percent in February, the strongest rise in three years and a reading that helped cool fears the weakness of the subprime mortgage market, dealing in high-risk home loans, is undermining the broader housing market and economy at large.

New home sales are also seen rebounding in February, up to an annualised rate of 985,000 units from 937,000 units.

"Any suggestion that residential property is coming towards the end of its recent adjustment should be well received and arguably could offer further upside for the greenback," David Jones, chief markets analyst at CMC Markets said in a note.

However others said that for euro/dollar to progress much lower, an upside U.S. data surprise would need to be matched by some worse than expected news from the euro zone, namely from Tuesday's release of German Ifo business sentiment for March.

Fed funds futures contracts point to around 40 basis points of Fed easing this year, compared with 56 basis points of easing priced in two weeks ago. The Fed left benchmark borrowing costs at 5.25 percent last week but removed from its statement a reference to the possible need for "additional firming".

© Reuters 2007. All Rights Reserved.

 

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