Currencies

Thursday June 26, 04:08 PM
Forex - U.S. dollar continues to fall against euro, pound

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LONDON (Thomson Financial) - The U.S. dollar continued to fall against the euro, reaching a 17-day low as market players scaled back their forecasts for Federal Reserve rate hikes, while the pound remained sharply higher against the U.S. unit

after hawkish comments from Bank of England rate setters.

The Federal Reserve on Wednesday left interest rates on hold at 2.00 percent as expected, but the accompanying statement sounded a less cautious note on inflation than some had expected.

'On inflation, the language is clearly tougher but the focus is on keeping

inflation expectations anchored rather than any perception that a fully fledged domestic driven inflation process is about to develop,' said Steve Pearson, currency strategist at HBOS (LSE: HBOS.L - news) .

'In short, unless there are signs that the current deceleration in wage growth will be suddenly reversed by a surprise economic rebound, the Fed won't be raising rates anytime soon,' he said.

As a result, market players have been scaling back their forecasts for near-term interest rate hikes in the U.S., and the perceived divergence in policy between the Fed and the European Central Bank -- which is expected to raise euro zone rates next week -- took the euro to a 17-day high of $1.5748.

The U.S. dollar meanwhile gained only marginally from news of an upgrade to first quarter U.S. quarterly GDP growth to 1.0 percent and slightly better-than-expected existing home sales data.

Elsewhere, the pound was sharply higher against the U.S. dollar, reaching a 7-week high of $1.9894, though it remained steady against the euro after earlier testimony from Bank of England Monetary Policy Committee members kept open the possibility that interest rates could be set to rise in the near term.

Outgoing deputy BoE governor John Gieve, and the Bank's markets director Paul Tucker, along with external MPC (A050540.KQ - news) members Kate Barker and Tim Besley all confirmed that they considered a rate rise at their June meeting. However they said they wanted more time to see how the medium-term risks to inflation panned out.

Governor Mervyn King also told the committee that his letter last week to Chancellor of the Exchequer Alistair Darling to explain why inflation had risen more than one percentage point above the Bank of England's 2.0 percent target was not intended to be dovish.

'The choice for most MPC members going forward would seem to be between either keeping rates unchanged or raising them. Should GDP growth not moderate enough or wage growth pick up, the BoE would probably move quickly to tighten monetary policy,' said Bank of America (NYSE: IKJ - news) economist Matthew Sharratt.

London 1437 GMT London 1108 GMT

U.S. dollar

yen 107.36 down from 107.78

Swiss franc 1.0282 down from 1.0304

Euro

U.S. dollar 1.5737 up from 1.5710

yen 168.97 down from 169.30

Swiss franc 1.6180 down from 1.6190

pound 0.7921 down from 0.7924

Pound

U.S. dollar 1.9861 up from 1.9822

yen 213.21 down from 213.61