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Thursday May 10, 2007 - 20:30:39 GMT
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FOREX NEWS-Dollar climbs vs euro as investors trim bearish bets

FOREX-Dollar climbs vs euro as investors trim bearish bets
Thu May 10, 2007 4:22 PM ET

(Recasts, updates prices)

NEW YORK, May 10 (Reuters) - The dollar advanced to one-month highs against the euro on Thursday as investors trimmed bearish bets on the greenback after key central bank meetings this week.

Comments by U.S. Treasury Secretary Henry Paulson that a strong dollar was in the interest of the United States, aired by CNBC on Thursday, also helped the greenback's rally gather momentum, traders said.

Sentiment on the dollar had been negative for many weeks on concerns over the U.S. economy and expectations for higher interest rates in Europe and the UK, pushing bearish positions on the currency to stretched levels.

But the outcome of three central bank meetings from the Federal Reserve, Bank of England, and European Central Bank offered few surprises, giving dealers little incentive to further sell the dollar.

"Essentially what is going on here is a reflection of the quite extended positions that existed going into the (central bank) statements," said Nick Bennenbroek, New York-based head currency strategist at Wells Fargo. It's an "unwinding or adjustment of positions in terms of euro longs and dollar shorts."

Being 'long' a currency is a bet it will rise, being 'short' is a bet it will fall.

The euro slipped as low as $1.3466 but last changed hands at $1.3484, down about 0.3 percent on the day.

Against the yen, the dollar rose as high as 120.54 yen , the highest since late February, when a surge of risk aversion boosted the yen before surrendering gains. It last traded down 0.1 percent at 119.90 yen.

Bennenbroek said yen strength against other currencies, was helping the yen to recover against the dollar. Euro/yen fell 0.4 percent to 161.70.

RATES OUTLOOK

The dollar gained strength on Wednesday after the Fed said in its policy meeting statement that inflation remained the main concern despite recent signs of economic weakness. That prompted some investors to pare back bets on the Fed cutting rates this year.

The euro showed little reaction after ECB President Trichet stressed the need for strong vigilance to ensure stable prices in the euro zone

Trichet's use of the word vigilant usually precedes an interest rate increase, but the market had widely expected him to telegraph such a move in June. The ECB on Thursday held rates steady at 3.75 percent, as expected.

"Trichet basically said the market was right, that the ECB is going to hike in June to 4 percent. But he was not convincing on the outlook after 4 percent," said Tim Mazanec, director of foreign exchange at Investors Bank and Trust Co. in Boston.

"This all gives us a sense that we may be getting close to a top in the euro," he added.

Sterling also fell against the dollar to $1.9792, down 0.8 percent on the day. The Bank of England raised rates to 5.5 percent, also as forecast, but the accompanying statement neither promised nor ruled out further action going forward.

Analysts said with future UK rate hikes clearly dependent on the outcome of future data, the BoE statement was viewed as a modest disappointment by a market that has fully priced in another rate increase before year-end.

Earlier, the dollar edged lower after the U.S. trade deficit for March came in much wider than expected but it recovered after Trichet's remarks.

The U.S. trade deficit rose to $63.89 billion from a revised trade gap of $57.89 billion in February. Markets were expecting a trade shortfall of $60 billion.

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


 

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