NEWS / Foreign Exchange

FOREX-Dollar gains in thin trade ahead of holiday

(Recasts; updates prices, adds reference to gunshot reports in Washington, fresh quote)

By Steven C. Johnson

NEW YORK, May 26 - The dollar posted broad gains against the euro and yen in thin pre-holiday trade on Friday, reversing earlier losses after a key U.S. indicator came in as expected.

Most analysts tied the greenback's strength to a bout of position-squaring ahead of a long holiday weekend in the United States and Britain.

The bid began gathering steam before the University of Michigan said its final reading on May consumer sentiment slipped to 79.1 from 87.4 in April, and the softer reading in that report did little to derail the greenback's gains.

Still, the dollar slipped off session peaks against the euro and yen on reports that gunshots were heard in the U.S. Capitol complex in Washington, and the Swiss franc briefly popped higher on the news.

But those moves were limited, and the story of the day appeared to be one of pre-holiday consolidation.

"There's a long weekend ahead, and after the huge moves we've had over the last two weeks, I think people are consolidating for the moment," said Meg Browne, currency strategist at Brown Brothers Harriman in New York.

In late morning, the euro <EUR=> had shed about half a percent against the dollar at $1.2740 after failing to breach the lower end of the $1.27-$1.29 range that has persisted over the last week.

Against the yen <JPY=>, the dollar was up 0.69 percent at 112.56 yen, off its session peak of 112.72. It was 0.7 percent stronger against the Swiss franc <CHF=> at CHF1.2255.

Sterling shed nearly a full percent against the dollar, tumbling at one point to a two-week low when British mortgage data came in below expectations. It was fetching $1.8565 in recent trade.

With London-based traders mostly gone for the long weekend and those in the United Stage soon to follow, "the foreign exchange market will be effectively closed, as liquidity will be very poor," said Paresh Upadhyaya, currency analyst at Putnam Securities in Boston.

Earlier Friday, the dollar lost ground against its rivals when a government report said the core personal consumption expenditures index, or PCE, for April advanced 0.2 percent, in line with economists' expectations, after posting a 0.3 percent rise the prior month. The core reading removes volatile food and energy costs.

Compared with a year earlier, the PCE index edged up by 2.1 percent, just above the threshold of the Federal Reserve's stated comfort zone of 1 percent to 2 percent.

But even that is "nowhere near an emergency level that would force the Fed to raise rates in June," said Boris Schlossberg, senior currency strategist at Forex Capital Markets in New York.

The Fed has lifted U.S. interest rates, now at 5 percent, 16 straight times since mid-2004 and has tied future increases to incoming economic data. (Additional reporting by Gertrude Chavez-Dreyfuss in New York)