|FOREX-Dollar rises vs yen, euro as U.S. stocks rally|
Tue Sep 4, 2007 4:05 PM ET
(Recasts; adds comments, updates prices)
By Vivianne Rodrigues
NEW YORK, Sept 4 (Reuters) - The dollar rose against the yen Tuesday, tracking a rally in U.S. equities after a report on August manufacturing eased fears of a steep decline in economic activity.
Earlier in the session, the yen pushed higher as a decline in European stocks reflected the unwinding of risky carry trades that use cheaply borrowed yen to buy higher-yielding currencies.
But gains in U.S. share prices reversed that as did a U.S. manufacturing report that showed only a narrow slowdown in August manufacturing activity. For details, see [ID:nN04317192]
"Equities are still driving currencies, and for now, the market isn't pricing in a radical contraction in U.S. growth," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.
In afternoon trading, the dollar moved 0.3 percent higher at 116.27 yen <JPY=>, well off a session low of 115.35 yen. Some analysts had earlier said the yen received a boost from reports that the Qatar government's $50 billion investment fund intended to increase investments in Asia to offset a weakening dollar.
The euro edged lower, dipping 0.1 percent to $1.3611 <EUR=>. Demand for the European currency slid for a second straight day. Analysts said investors are cautious about building large positions on the euro ahead of an European Central Bank policy meeting on Thursday.
The ECB last raised rates in June, to 4.0 percent from 3.75 percent, and was widely expected to tighten policy again this month until the latest flare-up of market volatility. The latest Reuters poll gave a median 40 percent chance of a rate hike when the European Central Bank meets on Thursday.
"It's still a close call for the ECB on rates," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. "That uncertainty is definitely having an impact on the euro."
U.S. markets are pricing in a quarter-percentage-point cut to the 5.25 percent federal funds rate when the Federal Reserve meets on Sept. 18. As early as last week, they were bracing for a half-point cut.
"The big question remains: 'What is the Federal Reserve going to do? Are they going to cut the rate and by how much?' Until we get the answer, the dollar is going to be trading in a range," said Gregory Salvaggio, senior currency trader at Tempus Consulting in Washington.
A dealer at a U.S. custody bank said some traders are starting to suspect the Fed may not succumb to pressure to cut rates, partly accounting for Tuesday's dollar bid.
Last week, Fed chief Ben Bernanke said the central bank was prepared to take action as necessary if financial turmoil were to start slowing growth, but added it was not the Fed's job to save speculators from investments gone sour.
Key for markets will be Friday's August U.S. employment report, expected to show 110,000 new jobs added, above July's 92,000 gain. Schlossberg said a report that comes in below 100,000 would stoke fears that the housing slump and credit crisis has started to cost jobs.
"I think the market may be too sanguine about the possibility of much worse growth," he said.
The Bank of England, Reserve Bank of Australia and Sweden's Riksbank are also meeting this week, though only the Riksbank is expected to lift rates. (Additional reporting by Steven C. Johnson in New York)