Wednesday May 30, 2007 - 21:40:41 GMT
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FOREX NEWS-Dollar rises as Fed reiterates inflation risk
FOREX-Dollar rises as Fed reiterates inflation risk
Wed May 30, 2007 4:46 PM ET
(Adds comments, updates prices)
By Vivianne Rodrigues
NEW YORK, May 30 (Reuters) - The dollar rose on Wednesday, touching a seven-week high against the euro, as minutes from the Federal Reserve's last meeting reiterated policy-makers' view that inflation remains a top concern.
The dollar's advance puts it on track for its biggest monthly rise against a basket of currencies <.DXY> since at least February 2006, as expectations for a cut in U.S. interest rates dwindled.
The implied chance of the Fed cutting rates by 25 basis points by the end of 2007 is now less than 50 percent, down from earlier in the year when futures traders priced in at least two cuts.
Some economists now expect the Fed will eventually have to raise rates, joining the European Central Bank, the Bank of England and the Bank of Canada, which are all expected to tighten policy at least once more this year to contain inflation pressures.
Higher rates tend to make a currency more attractive.
"In the end, the Fed may not need to cut rates several times this year as was expected and that, combined with some good economic indicators, has been supporting the dollar," said Paresh Upadhyaya, a currency manager at Putnam Investments in Boston. "The minutes reiterate their view that inflation remains a risk."
By late afternoon in New York, the euro was down 0.1 percent on the day, at $1.3432 , having earlier dipped below $1.3410, the lowest level since April 11.
In the Fed minutes, policy-makers said risks to economic activity are tilted to the downside while the risk that inflation may fail to ease is still the bank's "predominant concern," as expected by most traders. For details, see [ID:nN30437257]
"The minutes have been largely overlooked mostly because markets have already discerned what the data indicates about economic conditions," said Charmaine Buskas, currency analyst at Moody's Economy.com in West Chester, Pennsylvania.
The Japanese yen also was little changed against the dollar after a 6.5 percent fall in Chinese stocks appeared not to have a lasting effect on risk appetite and more specifically on carry trades, where investors borrow low-yielding currencies such as the yen to buy higher-yielding assets.
Chinese stocks fell in response to the government raising a tax on stock trades.
The dollar traded at 121.58 yen , while the euro was down 0.2 percent against the Japanese currency at 163.32 yen .
"China's decision affects mainly local investors," said Putnam's Upadhyaya. "It's not a shock big enough to derail the carry trade or spoil investor's appetite for higher-yielding currencies."
Upadhyaya added that investors now will focus on a second reading of U.S. first-quarter GDP on Thursday and on the May payrolls report scheduled for release on Friday.
The resilience in investor penchant for high-yielding currencies was most reflected in the Australian dollar and New Zealand dollar on Wednesday. The Australian dollar rose 0.5 percent to $0.8221 , while the New Zealand dollar jumped 0.4 percent to $0.7292 .
(Additional reporting by Kevin Plumberg and Nick Olivari in New York)
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