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Dollar finally gaining traction against the majors

Fri, Jun 20 2008, 05:51 GMT
by Benny Menashe

Finotec Group Inc.

Currency forecasters are betting that the dollar rally is just getting started as the Federal Reserve's shift to fighting inflation makes it likely to raise interest rates more aggressively than the European Central Bank. The currency could strengthen 2.1 percent to $1.51 per euro by year-end. Economists anticipate that the ECB will raise rates a quarter-percentage point by September and then cut borrowing costs by yearend. Fed Chairman Ben S. Bernanke, who said he's ``attentive'' to the U.S. currency, could boost rates three-quarters of a percentage point by the end of the third quarter of 2009.
The dollar had its biggest weekly gain in three years against the European and Japanese currencies. It strengthened 3.1 percent versus the yen last week and reached a four-month high of to 108.61 today.

The dollar climbed 2.5 percent against the euro in the week and was little changed at $1.5439 today. The Fed's commitment to price stability and maximum employment ``will be key factors ensuring that the dollar remains a strong and stable currency,'' Bernanke said June 3. The remarks were a ``change of rhetoric'' that showed the dollar ``has bottomed,'' said Stephen Jen, chief currency economist at Morgan Stanley in London, who used to work at the Fed. On the other hand dollar bulls are still in the minority, in part because ECB President Jean-Claude Trichet has also said inflation is a concern and the ECB rate is double the Fed's.

Bank of England Governor Mervyn King may be forced to keep interest rates as they are or even hike them which may result in a recession. Inflation reached 3.2 percent in May, the most since the measure's inception in 1997. A rate that high requires King by law to write a letter of explanation to the Treasury. The statistics office will publish the data tomorrow at 9:30 a.m. in London. At 5 percent, Britain's interest rate is the highest in the Group of Seven industrialized nations. U.K. inflation is also lower, at 3 percent in April, compared with 3.9 percent in the U.S. and 3.6 percent in May for the euro region. The Sterling is currently trading at 1.9588 against the greenback.

The yen fell against the euro, approaching a seven-month low, as gains in Asian stocks encouraged investors to add to holdings of higher-yielding assets funded in the Japanese currency. ``The yen is grinding lower,'' said Osao Iizuka, head of foreign-exchange trading in Tokyo at Sumitomo Trust & Banking Co., Japan's seventh-largest lender. ``Stocks are stabilizing and that's a sign of improvement in risk appetite.'' The yen fell to 166.94 per euro at 8:00 a.m. GMT from 166.35 late in New York on June 13. It earlier touched 166.94, close to the lowest level since Nov. 7. The currency slid to 108.58 per dollar, the lowest since Feb. 14, before trading at 108.43, from 108.19.

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Published on  Fri, Jun 20 2008, 05:56 GMT