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Dollar struggles after stumble Original Source Link: (May no longer be active)
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Dollar Struggles Up After Stumble
Wed Sep 22, 2004 06:38 AM ET
By Christina Fincher
LONDON (Reuters) - The dollar struggled up from a one-month low against the euro on Wednesday after the U.S. central bank raised interest rates, as expected, but indicated little rush for more aggressive hikes in the coming months.
The Federal Reserve raised its benchmark rate to 1.75 percent on Tuesday, its third quarter-point hike since June when it ended a long period of super-low borrowing costs.
The dollar hit a one-month low against the euro and lost over one percent against the Swiss franc after the announcement, as the accompanying statement said inflation pressures and inflation expectations had eased.
"The inflation comment is supporting the view that the gradual tightening of monetary policy will not accelerate and might even take a small pause when we come toward the end of the year," said Niels Christensen, currency strategist at Societe Generale in Paris.
By 6:20 a.m. EDT the euro had retreated to $1.2285 after hitting a one-month high of $1.2346 in New York. The dollar fetched 1.2588 Swiss francs, having fallen 1.4 percent on Tuesday to a one-month low of 1.2513 francs.
The euro found brief support from data showing the euro zone's trade surplus expanded more than expected to 12.6 billion euros in July from an upwardly revised surplus of 9.0 billion in June.
WINNERS AND LOSERS
The euro hit a one-month high against the yen for a second consecutive day as high oil prices and a further slide in Tokyo's stock market undermined the Japanese currency.
The dollar also made gains, climbing nearly half a percent to 110.25 yen.
Japan's Nikkei average fell for a fifth straight day on Wednesday, hitting a one-month closing low as technology companies were hurt by renewed caution about the country's economic outlook.
Traders were also keeping a close eye on oil prices which held above $47 a barrel after Hurricane Ivan disrupted crude production in the Gulf of Mexico.
Japan's reliance on imports for all its oil needs makes the yen highly sensitive to rising crude prices.
Sterling was on the defensive after minutes of the Bank of England's latest policy meeting reinforced expectations that UK interest rates were near a peak.
The minutes showed policymakers voted unanimously to leave UK rates unchanged at 4.75 percent earlier this month and were concerned about the risk of a sharp house price correction and the effect this could have on consumer spending.
"The need to hike rates further is looking very dubious indeed and this is doing the damage to sterling," said Jason Bonanca, currency strategist at CSFB.
Sterling fell a third of a cent against the dollar and re-tested the previous day's seven-month low against the euro before recovering some of its losses.
WHERE NEXT?
In its statement, the Fed offered a relatively optimistic view of the U.S. economy, saying output growth appeared to have "regained some traction," and labor market conditions had "improved modestly."
But it noted that both inflation and inflation expectations had eased, raising doubts as to whether it would continue to raise rates at its two remaining meetings this year, in November and December.
A Reuters survey taken in New York after the Fed decision showed all 22 economists polled expected another rate rise on November 10, just after the presidential election.
Fifteen of the 22 economists saw rates at 2.0 percent at the year-end, implying they expected no rate rise in December.
Some dealers said the euro's gains were an extension of a rise prior to the Fed action, which they said could be linked to expectations of mounting inflationary pressure in the euro zone.
Speaking on Wednesday, European Central Bank President Jean-Claude Trichet said he was aware of the risks to price stability and would act if needed to keep inflation in check.
The ECB has held interest rates at 2 percent for 15 months and has not raised rates for over four years.
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