Currencies

Thursday May 8, 02:25 AM
Forex - U.S. dollar extends overnight gains as rate cuts less likely

SYDNEY (Thomson Financial) - The U.S. dollar was trading slightly firmer against major currencies on Thursday, adding to

overnight gains on growing view that the Federal Reserve may be nearing the end of its rate-cutting cycle.

At 10:30 a.m. (0030 GMT) the dollar was trading at 104.80 yen from 104.62 yen in late New York trade while the euro was at $1.5349 from $1.5389.

Hawkish comments from Kansas City Federal Reserve President Thomas Hoenig and a larger-than-expected rise in U.S. productivity last quarter helped boost the dollar against most major currencies.

Hoenig said that the U.S. economy will recover in the second half of the year and the

'troublesome' inflation outlook meant the Fed must stand ready to remove policy accommodation in a timely manner.

There was also impetus for the stronger greenback from much weaker-than-expected economic reports in the eurozone and UK.

The euro tumbled from above 1.5500 to as low as 1.5367, hurt by unexpected falls in ruro zone retail sales and German factory orders in March.

NAB Capital Markets head of currency strategy John Kyriakopoulos said the European Central Bank (ECB) is expected to announce no change in interest rates tonight.

But, Kyriakopoulos said should ECB President Jean-Claude Trichet acknowledge increased downside risks to growth during his post-meeting press conference, the euro could break below the $1.5350 level that has contained pullbacks since mid-March.

A larger-than-expected fall in UK industrial production in March weighed on the pound which fell

to a 12-week low just above $1.9500 overnight, ahead of Thursday's Bank of England (BoE)

interest rate decision.

Kyriakopoulos said NAB's UK economists expect the BoE to cut rates by 25 basis points to 4.75 percent due to the housing market downturn but the consensus forecast is for a rate cut happening in June, not tonight.

He said the consensus view is that the BoE rate setters need more evidence that growth has fallen below what is expected by the central bank.

Kyriakopoulos said the stronger greenback, a fall in gold and metals prices, along with worsening risk-appetite among investors has put the Australian dollar on the back foot going into today's key jobs report for April after recent strength.

The data will be released at 11:30 a.m. At 10:45 a.m., the Australian dollar was at $0.9375, down from $0.9424 in late New York trade.

'It will likely require evidence that the labour market remains strong to get the currency noticeably higher,' said Kyriakopoulos.

The consensus forecast is for a 10,000-job gain in April, well below the six-month average of 26,500.

'No economist forecasts a fall, which would see the Australian dollar tumble as traders price a (Reserve Bank of Australia) rate cut,' said Kyriakopoulos.

On Tuesday, the RBA left its cash target rate at a 12-year high of 7.25 percent but was more hawkish in its monthly statement, leaving the door open for further rate increases.

Sydney 10:45 a.m. (0145 GMT)

U.S. dollar

yen 104.80

Swiss franc 1.0579

Euro

U.S. dollar 1.5349

yen 160.840

Swiss franc 2.0643

pound 0.7865

Pound

U.S. dollar 1.9520

yen 204.495