FOREX NEWS -Dollar rises as Fed signals rate cut not imminent
FOREX-Dollar rises as Fed signals rate cut not imminent
Tue Aug 7, 2007 4:34PM EDT
(Updates prices, adds comment, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 7 (Reuters) - The dollar rose against the euro on Tuesday, maintaining gains after the Federal Reserve held U.S. interest rates steady, as expected, and said inflation remained its primary concern.
The Fed acknowledged that financial markets have been volatile in recent weeks and credit conditions have become tighter, but the U.S. central bank said the economy was likely to expand at a moderate pace in the coming quarters.
Investors viewed the Fed's statement as an indication that it will hold off cutting interest rates, effectively preserving the greenback's yield advantage over other major currencies.
The Fed said a moderation in U.S. core inflation was still not evident.
"The statement is not as dovish as some participants hoped for, and the dollar has strengthened modestly in the immediate aftermath," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.
Late afternoon in New York, the euro <EUR=> was down 0.3 percent against the dollar at $1.3746. Against the yen <JPY=>, the dollar was slightly down at 118.66 yen.
The yen had briefly rallied against major currencies on the Fed's inflation remarks, tracking initial falls in the U.S. stock market, but came off highs as equities rebounded.
In recent weeks, the yen has maintained a tight negative correlation with U.S. stock prices. When stock prices are falling, investors tend to buy back the yen to unwind investments in risky carry trades, in which purchases of higher-yielding currencies are financed by borrowing cheaply in the Japanese currency.
U.S. equities closed higher, with investors heartened by the Fed statement that it is keeping an eye on credit markets, although future policy would still depend on the outlook for inflation and growth.
The implied chances for a rate cut at the next Federal Open Market Committee meeting in September fell to 20 percent from 46 percent on Monday.
Prospects for an October cut dropped to 52 percent from 84 percent. An October ease was fully priced as recently as Friday but has retreated in step with a higher stock market.
Futures prices still imply one quarter-percentage-point Fed rate cut by year-end and two by mid-2008.
Some analysts said that while inflation remained a focus of the Fed, it could move to a more neutral stance at the September meeting.
"While the Fed chose to retain its inflation bias, it may very well decide to move to a neutral bias at its next meeting if upcoming data confirm that core inflation has moved back to the preferred 1-2 percent range," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.
"It also appears that if the Fed is forced to cut interest rates due to the subprime crisis, it will not be a pre-emptive 25 basis-point action but rather an after-the-fact 50-100 bps rescue effort," he added.
Against the Swiss franc, the dollar rose 0.4 percent to 1.1962 francs <CHF=>. Sterling, meanwhile, fell 0.4 percent to $2.0230 <GBP=>.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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