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Dollar rises as a hike on the interest rate is on the cards

Wed, Jul 23 2008, 12:06 GMT
by Benny Menashe

Finotec Group Inc.

The dollar rose to a two-week high against the yen after Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised. The greenback traded near a two-week high versus the euro and the Swiss franc as Paulson said he expects Congress to approve a rescue plan for Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies. The yen fell to a record low against the euro as stocks climbed, encouraging investors to add to holdings of higher-yielding assets funded in the Japanese currency. ``The dollar got a lot of support from U.S. officials,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo, France's second-largest bank by market value. ``The Fed official's comments were very hawkish. Paulson's remarks helped ease concern over troubled government- sponsored enterprises.'' EUR/USD is currently trading at 1.5764 as of 7:24 am, GMT.

The pound strengthened against the euro for a second day and was little changed versus the dollar before the Bank of England publishes the minutes of its latest policy meeting. ``The attention has shifted away from inflation significantly and the market is focusing on growth and recession issues,'' said Matteo Regesta, an interest-rate strategist in London at BNP Paribas SA, France's biggest bank. ``The tone remains bullish towards gilts right now.' The Bank of England must act quickly to cut rates to avoid a slowdown similar to the one in the U.S, policy maker David Blanchflower told the Guardian newspaper in an interview published July 21. His colleague, Andrew Sentance, said July 17 he's been ``particularly struck'' by the jump in inflation and he considered voting for higher interest rates last month. GBP/USD is currently trading at 1.9921 as of 7:41 am, GMT.

Investors should enter three-year risk reversals by selling yen call options and buying yen puts versus the dollar as Japanese investors may increase purchases of overseas assets, said Royal Bank of Scotland Group Plc. ``After next year, the yen is more likely to weaken to 110 than it is to rise to 90,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at RBS in Tokyo, confirming a report he wrote yesterday with Nhan Le and John Richards. ``Investor outflows and have picked up pace and will continue. The market will correct its bias for yen calls.'' The USD/JPY is currently trading at 107.74 as of 8:15 am, GMT.

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Published on  Wed, Jul 23 2008, 12:10 GMT