FOREX NEWS - Dollar edges up ahead of FOMC but risks remain
FOREX - Dollar edges up ahead of FOMC but risks remain
Tue Aug 7, 2007 6:42AM EDT
(Recasts, updates prices, adds quote, comment)
By Jamie McGeever
LONDON, Aug 7 (Reuters) - The dollar edged up against a basket of major currencies on Tuesday ahead of the Federal Reserve's decision on interest rates and accompanying statement later in the day.
The Federal Open Market Committee is widely expected to leave rates on hold at 5.25 percent, so the focus will be firmly on what policymakers say in their statement.
The broad return of risk appetite to financial markets over the past 36 hours -- Wall Street rallied late Monday and European stocks were sharply higher Tuesday -- partly reflects investors' belief policymakers will soothe concerns about the recent turbulence in credit and U.S. mortgage markets.
The dollar also drew support on Tuesday from revived expectations they will reiterate their stance that controlling inflation remains the number one policy concern, thus trimming some of the more dovish bets placed in interest rate futures markets recently.
Still, against a backdrop of some below-consensus U.S. economic indicators and volatile credit markets, traders are discounting at least one quarter point rate cut this year and are far from convinced the credit-related volatility is over.
"Our view is that the statement remains unchanged but that the risks are asymmetrically biased to the downside for the dollar," said Michael Klawitter, head of currency strategy at Dresdner Kleinwort in Frankfurt.
"But will the market take that at face value and will the dollar get significant support from that? I guess not. Even if the statement is unchanged, there will be limited support for the dollar ... but if the statement shifts its bias slightly away from inflation risks the dollar would come under renewed pressure."
At 1230 GMT the dollar index was up 0.1 percent at 80.345 (.DXY: Quote, Profile, Research), after falling below the psychologically key 80.0 level on Monday to a 15-year low.
The dollar was little changed against the yen at 118.80 yen, after setting a four-month trough on Monday <JPY=>, and the euro was steady at $1.3800 <EUR=>, within sight of its record peak just above $1.3850.
The dollar's gains came against sterling <GBP=> after data showed surprisingly tame UK retail sales growth in July, the Canadian dollar <CAD=> on the back of falling oil prices this week, and the higher-yielding Australian and New Zealand dollars <AUD=> <NZD=> as investors liquidated long carry trade positions ahead of the FOMC.
Monday's 2 percent rally in U.S. stocks helped ease investor worries about a credit squeeze, but analysts were still expecting the U.S. central bank to acknowledge recent turbulence after a widely-expected decision to leave rates on hold later.
"Equity markets are doing all the driving at the moment and that continues to be the case. Last night the strong bounce in U.S. equities had helped calm markets ahead of the Fed today," said Mitul Kotecha, head of global foreign exchange research at Calyon.
"No-one is expecting the Fed to move rates but the statement will be very, very important. It seems that they will maintain that the inflation risk is predominant, but markets are looking for any comments whatsoever on the state of the debacle in credit markets," Kotecha said.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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