Market News - NYSE

Thursday June 26, 06:36 AM
Forex - Dollar steady in afternoon trade after Fed fails to surprise market

HONG KONG (Thomson Financial) - The U.S. dollar was steady against the euro and the yen in afternoon Asian trade on Thursday, with investors looking for fresh clues after the Federal Reserve failed to surprise the market at the end of its two-day meeting.

As widely predicted, the Federal Open Market Committee (FOMC) on Wednesday kept its key interest rates unchanged at 2 percent, pausing after seven rate cuts from September to April.

The Fed reiterated its concerns about inflation and the risks to growth, providing little clues on where interest rates are headed in the coming months.

It kept its rate unchanged even after the European Central Bank (ECB) signalled as early as last month it was ready to raise its benchmark rate in July after keeping it steady for a year.

A rate hike in the ECB as early as next month has largely been priced in by the currency market.

'The FOMC meeting was pretty much a non-event. The statement came out pretty balanced. Until the market is sure that either side -- the Fed and the ECB -- will provide an advantage in terms of interest outlook, currencies will trade at a range,' said Philip Wee, currency strategist at DBS Bank in Singapore.

At 1:00 p.m. (0500 GMT), the euro was quoted at $1.5674 from $1.5673 in Sydney this morning. The dollar was trading at 107.93 yen from 107.88 yen earlier.

Investors were also hesitant to push the major currencies in any direction until after the release on Friday of the core inflation data in the United States.

Core (Berlin: LJ1.BE - news) inflation does not include the volatile energy and food costs and is the Fed's preferred barometer when assessing movements in consumer prices.

The Fed statement pointed to a few positive signs in the U.S. economy, including 'some firming in household spending'. But it also said rising energy prices are likely to limit growth and quicken inflation.

Rob Henderson, chief economist at NAB Capital Markets, said the bottom line 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.'

Since it began easing its monetary policy in September, the Fed has trimmed rates by 325 basis points, bringing the rates to their lowest levels since December 2004.

The ECB, on the other hand, has maintained its rate at 4 percent, a six-year high, since June 2007.

Hong Kong 1:00 p.m. (0500 GMT)

U.S. dollar

yen 107.93

Swiss franc 1.0353

Euro

U.S. dollar 1.5674

yen 169.22

Swiss franc 1.6231

pound 0.7940

Pound

U.S. dollar 1.9736