Dollar Gains on Outlook for Fed Hikes

Mon Sep 20, 2004
By Kyle Peterson

CHICAGO (Reuters) - The dollar rose broadly on Monday as markets braced for a Federal Reserve policy meeting this week that is widely expected to end with a higher federal funds rate, making the dollar a more attractive currency.

Economists generally agree the Federal Open Market Committee will raise rates by 25 basis points on Tuesday, adding to rate hikes delivered in June and August. The expected increase would lift the rate to 1.75 percent.

The dollar has benefited from rising interest rates and expectations for higher rates to come because higher rates burnish the allure of short-term, dollar-denominated deposits.

Traders, therefore, are focused on Fed signals on monetary policy, as recent weak data have raised doubts about the strength of the U.S. economy. Their view on the economy, in turn, will likely affect the pace of the Fed's campaign to raise rates to a more neutral level after a period of accommodatingly low rates.

"We're watching for a comment that says the Fed is committed to respond as needed to maintain price stability," said Meg Browne, currency analyst at HSBC in New York. She said a comment like that would bolster expectations for a November rate increase.

"I think the market has priced in this hike, and it's priced in at least one more hike (this year)," she said.

In midmorning U.S. trade, the euro was down 0.41 percent at $1.2144 (EUR=: Quote, Profile, Research) . The dollar gained 0.29 percent to 109.88 yen (JPY=: Quote, Profile, Research) .

The dollar was up 0.54 percent at 1.2753 Swiss francs (CHF=: Quote, Profile, Research) . Sterling fell 0.51 percent to $1.7831 (GBP=: Quote, Profile, Research).

"It's extremely quiet and not all that volatile," said Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston. He agreed that markets would be glued to the Fed's statement on the economy on Tuesday.

"If they were to mention a slower but sustainable ongoing recovery, that would be a less robust call on the economy than their last statement," Mazanec said.

Low interest rates were one factor which helped drive the dollar to a record low against the euro earlier this year. After interest rate hikes in June and August, traders have come to expect further moves as part of a "measured" campaign of gradual interest rate increases.

"The FOMC will probably maintain a slightly hawkish tone which will give some near-term support to the dollar," said Adrian Foster, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein.
Aside from the focus on U.S. rates, Monday's U.S. session offers little market-moving news and data. But after Tuesday's Fed meeting, markets will look to data later in the week on home sales and durable goods orders to signal whether the economy is pulling out of a soft patch and gaining "traction," as Fed chief Alan Greenspan has said.

The market was also watching the price of oil, which raced above $46 a barrel on Monday after Russia's YUKOS oil firm suspended some oil exports to China. Traders also remained concerned about storm-related disruptions of supply into the United States.

The Group of Seven rich nations and China are due to meet in Washington next week. At the last meeting in May, G7 finance ministers called on oil-producing nations to boost supply to lower oil prices.

In Europe, European Central Bank President Jean-Claude Trichet speaks at noon (1600 GMT) and chief economist Otmar Issing speaks half an hour later.

While an ECB rate rise is not seen on the cards in the next month or so the market will be watching for a continuation of the slightly more hawkish tone the European central bank has taken since returning from its summer break.

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