FOREX-Fed minutes lift dollar, euro gets PMI boost

By Carolyn Cohn

LONDON, June 1 - The dollar rose against major currencies on Thursday after minutes from the Federal Reserve's latest policy meeting stoked expectations that the central bank will raise interest rates again in June.

However, the greenback trimmed its gains versus the euro after euro zone PMI posted an unexpected rise in May, fuelling speculation that the European Central Bank could raise interest rate by 50 basis points next week rather than just 25.

In the U.S., minutes released on Wednesday from the May 10 Fed meeting showed that policymakers were not sure how much higher rates should climb, if at all, but a mention that inflationary pressures were increasing helped boost expectations that rates would rise.

A sell-off in emerging markets, commodities and metals -- including the price of spot gold <XAU=> dropping to a one-month low -- also prompted buying of dollars as people reinvested their money in the U.S. currency.

"What is helping the dollar are the hawkish Fed minutes and also the emerging markets sell-off, the profit-taking we are seeing in many commodity markets," said Hans-Guenter Redeker, chief FX strategist at BNP Paribas.

The dollar rose to a four-week high at 113.07 yen <JPY=>, with traders citing buy orders around the 113 level. It was trading at 112.83 yen at 0940 GMT, up a quarter percent on the day.

The dollar was also a quarter percent higher against the euro at $1.2781 <EUR=>, but off an earlier session high of $1.2752.

EURO ZONE EXPANSION

The RBS/NTC euro zone PMI rose to 57.0 in May from 56.7 in April and versus forecasts for a fall to 56.5, showing that the bloc's manufacturing sector expanded at its fastest pace in nearly six years last month.

"The data is stronger than expected. The outlook remains positive for the euro zone's economy. There's not an insignificant risk that the ECB will go for 50 basis points next week and this (data) reinforces those views," said Kamal Sharma, currency strategist at Bank of America.

Euro zone rates are currently at 2.5 percent, exactly half the level of U.S. interest rates.

Revised euro zone gross domestic product (GDP) data for the first quarter showed growth of 0.6 percent on the quarter, and 1.9 percent on the year. The euro zone unemployment rate stayed flat at 8.0 percent in April.

In the United States, the Institute for Supply Management's manufacturing index is due at 1400 GMT and is forecast to fall to 55.5 from 57.3.

The Fed minutes offered an incentive to buy back the dollar in a market rattled by concerns about the recent sell-off in world share markets and uncertainty about U.S. currency policy once Henry Paulson replaces John Snow as Treasury Secretary.

"The market was building up short positions in the dollar, now we are reversing that," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank.

The U.S. currency came under pressure after calls in April from the Group of Seven economic powers for appreciation in Asian currencies sparked speculation that Washington wants a weaker dollar to stem the ballooning U.S. current deficit.