Dollar News

Dollar Snaps Two-Day Drop on Rising Bets for Fed Rate Increase

May 22 (Bloomberg) -- The dollar snapped two days of declines against the euro, rallying from the lowest level in a month, as traders added to bets the Federal Reserve will raise interest rates by year-end.

The U.S. currency also gained versus the yen after minutes of the Fed's April meeting yesterday showed most policy makers viewed the cut in the target rate to 2 percent as ``a close call,'' indicating the central bank has gone on hold to stem inflation. The New Zealand dollar rose to a two-week high after tax cuts reduced the need to lower borrowing costs.

``The Fed is telling us to not think in terms of easing,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``That is the most important feature behind the dollar comeback today.''

The U.S. currency strengthened to $1.5708 per euro as of 10:22 a.m. in New York, from $1.5795 in New York yesterday. It earlier touched $1.5814, the lowest level since April 24. The dollar rose to 104.04 yen, from 103.05 yen. The euro traded at 163.44 yen, up from 162.76 yen.

The dollar extended its gains after U.S. house prices fell less than expected in the first quarter. The Office of Federal Housing Enterprise Oversight said its house price purchase index declined 0.2 percent, from a revised 0.3 percent gain the previous quarter. The median forecast in a Bloomberg News survey of 13 economists was for a drop of 1.3 percent.

The New Zealand dollar rose after Finance Minister Michael Cullen cut taxes, easing pressure on the central bank to lower interest rates to support the economy. The kiwi, as it is known, climbed to 78.96 U.S. cents, the highest level since May 7, before trading at 78.54 cents, from 77.70 yesterday.

Fed Rate Bets

The Australian dollar yesterday touched the highest since being allowed to trade freely in 1983 as investors sought the nation's higher-yielding debt. The currency, which climbed to as high as 96.54 U.S. cents yesterday, was at 95.84 cents today, from 96.25. The Aussie has risen 10 percent this year, the second-biggest gain among the 16 most-traded currencies.

The Aussie will climb to equal value with the U.S. currency for the first time since 1982 as the central bank considers raising interest rates, say banks including RBC Capital Markets and ABN Amro Holding NV.

Futures on the Chicago Board of Trade show traders see a 92 percent likelihood the Fed will keep its target rate for overnight lending between banks at 2 percent on June 25, up from odds of 88 percent yesterday. Traders also see a 32 percent probability the Fed will lift the rate in September to 2.25 percent, up from a 21 percent chance yesterday.

``The Fed has a more balanced view on inflation and growth,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank by assets. The dollar decline has ``lost momentum.''

ECB Interest Rate

The dollar has fallen 2 percent against the euro since May 8, after European Central Bank President Jean-Claude Trichet said inflation remains the bank's top priority. That signaled policy makers won't cut the 4 percent benchmark interest rate soon.

The dollar advanced to $1.9806 against the British pound, from $1.9732, and was at 1.0334 versus the Swiss franc, from 1.0250. The Fed cut its 2008 economic growth projection to a range of 0.3 percent to 1.2 percent, from its January forecast of 1.3 percent to 2 percent, according to the minutes.

The Dollar Index traded on ICE futures in New York, which tracks the dollar against currencies of six trading partners, rose to 72.071, from 71.938 yesterday.

Oil Price

Gains for the dollar may be limited as record oil prices stoke inflation while slowing economic growth, said Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, France's biggest bank. Oil surpassed $135 a barrel for the first time today before settling back to around $133.

``The dollar will remain on the back foot,'' Redeker said. It will be hurt by ``further increases in commodity prices.''

The euro climbed versus the dollar yesterday after German business confidence unexpectedly rose, bolstering speculation the ECB won't cut interest rates.

The Munich-based Ifo institute said its index, based on a survey of 7,000 executives, rose to 103.5, from 102.4 in April. Economists predicted a decline to 102, according to the median of 44 forecasts in a Bloomberg News survey. Germany is the biggest economy in the euro region.

The euro may rise to $1.5850 against the dollar in one week, based on charts used to predict price movements, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The currency has held above so-called support at the five- and 21-day moving averages of $1.5663 and $1.5553, respectively, signaling further gains in the near term, Tokyo-based Hashimoto said. Support is where buyers are expected to outweigh sellers.

The resistance level of $1.5850 represents a 76.4 percent reversal of the euro's slide to a low of $1.5285 on May 8, from a record high of $1.6019 on April 22, based on a series of numbers known as the Fibonacci sequence. Resistance is a level where selling is expected to outweigh buying.