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Monday May 21, 2007 - 20:57:19 GMT
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FOREX NEWS-Dollar firms on US rate view, focus on China

FOREX-Dollar firms on US rate view, focus on China
Mon May 21, 2007 4:29 PM ET

(Updates prices, adds quotes)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 21 (Reuters) - The dollar rose to five-week highs against the euro and three-month peaks versus the yen on Monday as investors further trimmed bearish bets on the greenback amid a growing view the Federal Reserve will not cut interest rates anytime soon.

Surprisingly strong U.S. data last week on housing starts, regional manufacturing, jobless claims and consumer confidence have helped the dollar rebound more than two cents from a record low against the euro hit last month.

"The dollar is doing well against the euro and yen and (is helped by) the Goldilocks scenario in the U.S., where's there's not too much worry about a hard landing," said David Powell, currency strategist at IDEAglobal in New York.

A "Goldilocks" economy is neither too hot that it causes inflation and nor is it too cold that it fuels a "hard landing" in recession.

The interest rate futures market last week showed a 64 percent chance of Fed easing in 2007. At the beginning of this year, analysts were pricing in more than one rate cut.

The stock market's continued strength and comments from Fed officials showing no real jitters about the economy or contagion from the subprime mortgage market crisis have undermined prospects for Fed cuts, analysts said.

"Also...long euro/dollar has been a very crowded trade based on the specs (trading) data last week. Euro longs hit another record high and people are reluctant to bring it any higher without a fundamental story to back it up," Powell added.

Industry data last week showed the number of long euro positions had grown to a record high, suggesting speculators' bets in favor of a stronger euro may have been getting overstretched.

By late afternoon in New York, the euro was down 0.3 percent on the day at $1.3466 , nearly 2 percent below a record peak hit last month. It fell as far as $1.3436 on electronic trading system EBS, the lowest since early April.

With little major U.S. economic data due this week, investors are looking ahead to a meeting between U.S. Treasury Secretary Henry Paulson and China Vice-Premier Wu Yi on Tuesday and Wednesday in Washington where they are expected to discuss trade relations, including the value of the yuan.

The U.S.-China meetings will be closely watched for any signs China is willing to let its currency strengthen more rapidly after last week's widening of the yuan's daily trading band against the dollar to 0.5 percent from 0.3 percent. But some analysts believe a further widening of the band is probably not in China's plans for now.

"The Chinese have a little bit of political cover now that they have widened the band, but I don't think the Chinese really intend to make the yuan appreciate faster," said Brian Dolan, director of FX research at in Bedminster, New Jersey.

"I'm not expecting anything to come out of the U.S.-China meeting. It may, in terms of timing, prove to be the catalyst in dollar/yen and euro/yen to take out key upside levels once the market realizes that nothing is changing," he added.

The Chinese currency firmed only marginally on Monday after the latest tweak to Chinese foreign exchange policy last week. But analysts agree a stronger yuan could help buoy other Asian currencies including the yen, which is the region's most liquid unit and is often traded as a proxy for the yuan.

The dollar was up 0.3 percent at 121.42 yen , after rising as high as 121.63. The Canadian dollar , however, continued to buck the trend, rising for the sixth of seven sessions to a near three-decade high against its U.S. counterpart.

The U.S. dollar was down about 0.3 percent at C$1.0846, as the Canadian currency continued to benefit from strong economic data and persistent signs of overseas buying interest in Canadian firms.

© 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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