Currencies

Thursday June 26, 01:56 AM
Forex - Dollar falls further against euro on weak rate hike signal from Fed

SYDNEY (Thomson Financial) - The U.S. dollar stayed at two-week lows against the euro on Thursday in response to the Federal Reserve failing to give a strong signal that it would raise interest rates later this year.

The dollar fell against the single European currency after the Federal Open Market Committee decided to hold its benchmark rate steady at 2.0 percent and, while acknowledging that there are inflationary pressures, said it expected these to ease later in the year.

In contrast, the European Central Bank has flagged it will hike rates next month from the current level of 4.0 percent, widening the interest rate differential across the Atlantic.

At 0020 GMT, the euro rose to $1.5673 from $1.5665 in late New York trade on Wednesday. Against the Japanese The dollar was at 107.88 yen from 107.83 while the

The Fed statement pointed to a few positive signs in the U.S. economy, including 'some firming in household spending.' But it also said persistently rising energy prices are likely to limit growth -- and not just quicken inflation, which also remains a concern for the central bank.

Rob Henderson, chief economist at NAB Capital Markets, said the bottomline is that the Fed has shifted to a mild tightening bias from a neutral stance.

'We don't expect the central bank to act on that bias in 2008. But we agree the next move will probably be up but not until mid 2009,' said Henderson.

A Reuters (LSE: TRIL.L - news) poll released after the FOMC statement showed that 16 out of 16 primary dealers expected the Fed to remain on hold at the August meeting; 14 out of 16 saw no change in September; and the median forecast was for rates to remain unchanged for the balance of 2008.

John Noonan, a senior foreign exchange analyst at Thomson Reuters IFR Markets, said there is skepticism that the Fed will back up its hawkish rhetoric on inflation with action.

'There is a view from the skeptics that the Fed's hawkish rhetoric is a ploy to ensure that the U.S. dollar doesn't get hammered too hard when the ECB starts hiking rates next week,' said Noonan.

'If the broader bond market starts to share the skepticism of the primary dealers and future rate hikes start getting priced out, the euro/dollar rate will continue to trend higher and force the Fed to look for another strategy to underpin the U.S. dollar.'

Meanwhile, Noonan said the Australian dollar remains buoyant and looks set to test resistance at 96.50/55 U.S. cents and a post-float high of 96.75 cents.

'Summer carry trade demand continues to support the Australian dollar and the Fed statement did not kick the commodities lower as some were hoping it would,' he said.

Sydney 10:20 a.m. (0020 GMT)

U.S. dollar

yen 107.88

Swiss franc 1.0351

Euro

U.S. dollar 1.5673

yen 169.035

Swiss franc 1.6223

pound 0.7938

Pound

U.S. dollar 1.9744

yen 212.972