Wednesday May 9, 2007 - 20:52:57 GMT
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FOREX NEWS-Dollar gains against the euro after Fed decision
FOREX-Dollar gains against the euro after Fed decision
Wed May 9, 2007 4:18 PM ET
(Recasts, updates prices)
NEW YORK, May 9 (Reuters) - The dollar gained against the euro and yen on Wednesday after the Federal Reserve held benchmark U.S. interest rates steady and said its main worry is that inflation will fail to moderate.
The widely expected decision by the U.S. central bank's Federal Open Market Committee keeps the overnight federal funds rate target at the level it has held since June 2006 of 5.25 percent following 17 straight quarter-point increases.
"The dollar is gaining across the board because the Fed made no recognition of the March slowdown in core inflation, the slowdown in payrolls, industrial production, and consumer spending," said Ashraf Laidi, chief FX analyst at CMC Markets in New York. "The fact that the Fed shrugged off these important factors is a signal to the market that the Fed will hold rates steady for the rest of the year."
The euro was down 0.1 percent at $1.3525 after the decision while dollar/yen gained 0.1 percent at 120.09 yen.
In a statement outlining its decision that hewed closely to its last announcement in late March, the Fed nodded to recent sluggish economic growth, but held to its view that the economy was likely to expand at a moderate pace in coming quarters.
It also said: "Core inflation remains somewhat elevated."
"Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures," the Fed said, in a reference to tight labor markets.
RATE FUTURES FALL
U.S. short-term interest rate futures fell after the Fed ended its policy meeting.
Futures showed the market expected the Fed to hold rates steady at 5.25 percent again in June while prospects for a cut in August dropped to 15 percent from 18 percent.
After the announcement, futures priced in just a single Fed rate cut in 2007, against an 18 percent perceived chance earlier that the Fed would cut rates twice.
But analysts said the dollar's gains after the Fed decision may be short-lived.
"I don't think any of this changes the outlook for a rate cut from the Fed later in the year," said Alex Beuzelin, senior market analyst at Ruesch International in Washington. "Today's move is really about short-term positioning."
Investor focus now shifts to rate decisions on Thursday from the Bank of England, which is seen raising rates to 5.5 percent, and the European Central Bank, which is likely to hold rates at 3.75 percent but signal a hike in June.
The euro zone and UK economies are still showing signs of growth at a time when the U.S. economy is slowing, increasing the relative appeal of the euro and sterling over the dollar.
Sterling was up 0.2 percent at $1.9934 .
A spate of soft U.S. economic data has helped push the dollar to record lows against the euro and 26-year lows against sterling.
Michael Woolfolk, senior strategist at The Bank of New York, said the euro may test its lifetime high above $1.3680 and make a run at $1.3700 by the end of the week. (Additional reporting by Steven C. Johnson, Vivianne Rodrigues, Gertrude Chavez and David McMahon)
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