Currencies

Friday June 27, 06:38 AM
Forex - Dollar extends gains in afternoon trade ahead of U.S. spending data

HONG KONG (Thomson Financial) - The U.S. dollar extended gains against the euro and the yen in afternoon Asian trade on Friday on hopes data due later today would show Americans spent more last month, helping ease fears the world's biggest economy may slip into a recession.

The Commerce Department's report on spending is expected to show Americans used most of the $70 billion in tax rebates released since May to shop for electronics and other goods. Last month's core inflation figure, excluding the volatile food and energy costs, will also be out on Friday.

'The data releases tonight, which underscore the state of the U.S. consumers, would be scrutinized for clues on the effects of the ongoing tax rebates,' said Thomas Lam, senior treasury economist at United Overseas Bank (U11.SI - news) in Singapore.

A recovery in consumer spending, which accounts for more than two-thirds of the U.S. economic output, may strengthen speculation that the Federal Reserve will raise its key interest rates in the last quarter of 2008 to stave off inflationary pressures, stemming mostly from record high oil prices and the recent weakness of the dollar.

The Fed will likely increase rates by half a percentage point in the last three months of this year, said Philip Wee, currency strategist at DBS Bank in Singapore.

At 1:00 p.m. (0500 GMT), the euro was buying $1.5726, down from $1.5743 in Sydney this morning and from $1.5760 in late New York trade on Thursday.

The dollar was quoted at 107.13 yen, up from 106.94 yen this morning and from 106.75 yen in New York last night.

'Generally, our house view is more optimistic about the economic recovery in the U.S. in the fourth quarter, which signals that the financial crisis is over,' Wee said.

The core inflation rate in the U.S. stood at 2.1 percent in April, above the Fed's 2 percent target.

The Fed will likely continue raising rates until 2009, Wee said.

From 2 percent at present, the Fed's target fund rate may go up to 4.5 percent by the third quarter of 2009, he said.

In contrast, the European Central Bank (ECB) is widely anticipated to hike its rate by a quarter point to 4.25 percent when policymakers meet on July 3 and keep it there for the rest of the year.

'The ECB rate hike in July is pretty much priced in by the market,' said UOB's Lam. 'The question will be, what (ECB President Jean-Claude) Trichet will say after the meeting.'

This will be the first time the ECB will raise its benchmark rate after keeping it at 4 percent, a six-year high, since June 2007.

The euro zone central bank has resisted calls to follow its peers in the U.S., Canada and the U.K. in lowering interest rates to boost the global economy, which was battered by unpaid home mortgages.

Since it began easing its monetary policy in September, the Fed has trimmed its rates by a cumulative 325 basis points. At its meeting this week, the Fed kept its rate steady at 2 percent, pausing after seven rate cuts.

With the Fed expected to aggressively hike rates from the fourth quarter of 2008 onwards, the dollar will likely start its long-awaited recovery against major currencies including the euro and the yen.

DBS Bank sees the dollar appreciating to $1.49 versus the euro and strengthening to 108 yen by year-end, Wee said.

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

U.S. dollar

yen 107.13

Swiss franc 1.0261

Euro

U.S. dollar 1.5726

yen 168.46

Swiss franc 1.6142

pound 0.7916

Pound

U.S. dollar 1.9865