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Wednesday May 23, 2007 - 11:09:23 GMT
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FOREX NEWS-Dlr hits 6-week highs as US rate cut hopes fade

FOREX-Dlr hits 6-week highs as US rate cut hopes fade
Wed May 23, 2007 7:04 AM ET

(Updates price, adds quotes, changes byline)

By Simon Falush

LONDON, May 23 (Reuters) - The dollar rose to six-week highs against a basket of currencies on Wednesday as globally bullish growth sentiment and belief central bankers will act to control inflation further eroded expectations of lower U.S. interest rates this year.

Sterling jumped across the board after minutes from the Bank of England's last policy meeting showed that all nine members of the Bank's Monetary Policy Committee voted to raise rates earlier this month and had even mulled a half-percentage point increase.

But the euro's deteriorating technical picture ensured the currency got no lift from a surge in euro zone industrial orders. Despite euro zone bond yields moving to fresh multi-year highs and rising interest rate expectations, the euro hit a six-week low against the dollar.

And the greenback hit a three-month high against the ultra-low yielding yen, which struggled against a backdrop of buoyant world stock markets boosted multi-year highs as risk-seeking investors finance these trades in low-yielding currencies.

"Fundamental data has been levelling off in the U.S. over the last couple of weeks after some weak numbers earlier in the year," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

"This has pushed back expectations on inflation and delayed expectations of a rate cut which is supportive of the dollar."

At 1030 GMT the dollar was up 0.2 percent at 121.73 yen , having traded as high as 121.87 yen.

The euro was off 0.2 percent at $1.3439 , having hit a six-week low of 1.3416 earlier in the session, while the dollar index <.DXY> was up at 82.44, having traded at a six-week high of 82.603.

Sterling was up 0.3 percent against the dollar at $1.9800 and the euro was off a quarter poercent at 67.xx pence .

Other high-yielding currencies like the Australian and New Zealand dollars also strengthened.


Comments by Richmond Federal Reserve Bank President Jeffrey Lacker on Tuesday, combined with recent upbeat U.S. data, prompted investors to scale back expectations for the central bank to lower its fed funds rate from 5.25 percent.

Lacker, seen as one of the Fed's more hawkish officials but not a voting member this year, said that financial markets were likely to understand that the Fed will not tolerate inflation and that he was comfortable with rates at the current level.

Interest rate futures show the chances of a U.S. interest rate cut in December at around 64 percent, down from 72 percent earlier in the week.

In fact, these diminishing expectations have driven the euro more than rising expectations of higher euro zone rates.

"I think the euro is heading for the mid-$1.33s. That seems to be the theme," said a UK bank trader in London, citing the currency's technical weakness.

In the absence of key U.S. data on Wednesday, investors are watching comments from the United States and China as a two-day talks between Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi concludes in Washington.

Both sides on Tuesday stressed the need for closer cooperation and dialogue on economic issues, although Paulson said Beijing could do more on FX reform.

People's Bank of China's vice governor Su Ning said on Wednesday it is not reasonable to link China's trade problem to its exchange rate abd that it is committed to gradual, controllable FX reform.

Last week, China's central bank widened the yuan's daily trading band against the dollar to 0.5 percent from 0.3 percent and raised interest rates, a move which produced only a short-lived reaction on financial markets.

© 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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