Dollar may gain for second day on wagers for fed rate increase

10:37, 23 May 2008
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The hryvnia was the worst performer of 178 currencies against the dollar?

The dollar may advance against the euro for a second day on speculation the Federal Reserve will raise interest rates by year-end to curb inflation, according to Bloomberg.

The U.S. currency yesterday rallied from a one-month low and rose versus the Japanese yen as minutes of the Fed`s April meeting released on May 21 showed most policy makers viewed the cut in the target rate to 2 percent as ``a close call.`` Ukraine`s hryvnia fell the most in more than eight years on speculation the central bank has resumed weakening the currency.

``The dollar bulls are digging their heels in,`` said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Bank of New York Mellon. The firm is the world`s largest custodian bank, with more than $20 trillion in assets under administration. ``The Fed might be more cognizant of the growing price pressures from oil. The easing cycle is close to an end.``

The U.S. currency traded at $1.5732 per euro at 6:01 a.m. in Tokyo. It rose 0.4 percent yesterday after touching $1.5814, the lowest level since April 24. It traded at 104.07 yen, after advancing 1 percent yesterday. The euro traded at 163.73 yen, following a 0.6 percent increase.

The dollar extended its gains yesterday as the price of crude oil fell below $131 after surpassing $135 earlier. A decline in the price of oil can lighten the financial burden on consumers. The U.S. currency also rose 0.8 percent against Norway`s krone and 0.6 percent against the Swiss franc.

Ukraine`s hryvnia fell 5.1 percent to 4.7875 amid speculation the central bank has resumed weakening the currency after it opposed a stronger hryvnia and changes to the official rate.

Worst Performer

The hryvnia was the worst performer of the 178 currencies tracked by Bloomberg against the dollar yesterday as investors bet that its depreciation was prompted by the Natsionalnyi Bank Ukrayyny. The central bank stopped daily action on the hryvnia in March, letting it rise more than 5 percent as inflation accelerated to 30.2 percent, according to ING Bank NV.

The Standard & Poor`s 500 Index rose 0.3 percent yesterday, leading the yen to fall 1.7 percent against the New Zealand dollar and 2.5 percent against the South African rand. The two currencies are popular in the so-called carry trade, in which investors borrow money cheaply to invest in assets where rates are higher.

The Japanese borrowing cost of 0.5 percent compares with 11.5 percent in South Africa and 8.25 percent in New Zealand. The allure of the trade falls when currency volatility rises as it jeopardizes returns on the interest rate spread.

Interest-Rate Bets

Futures on the Chicago Board of Trade showed traders saw 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 on May 21. Traders also saw a 33 percent probability the Fed will lift the rate in September to 2.25 percent.

Policy makers have raised their consumer-price estimates and lowered their growth forecast, according to minutes of the Fed`s April 29-30 meeting. U.S. consumer prices, minus food and energy costs, are projected to rise by 2.2 percent to 2.4 percent, up from a range of 2 percent to 2.2 percent in the last forecast in January. Fed officials estimated U.S. gross domestic product will increase by 0.3 percent to 1.2 percent this year, down from their previous estimate of 1.3 percent to 2 percent.

``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.``

The Dollar Index traded on ICE futures in New York, which tracks the dollar against currencies of six trading partners, rose 0.5 percent yesterday to 72.277.

Existing Home Sales

The dollar`s gain may be limited as a report today may show U.S. existing home sales fell to a record low last month. Sales of previously owned homes probably dropped to an annual rate of 4.85 million, from 4.93 million the previous month, according the median forecast in a Bloomberg News survey of 67 economists. The National Association of Realtors is scheduled to release the report at 10 a.m. in Washington.

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 decline gathered momentum after on May 21 after German business confidence unexpectedly rose. Germany is the biggest economy in the euro region.


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