NEWS / Trade Policy

Dollar shoots to 1-month high vs yen on hawkish Fed

By David McMahon

NEW YORK - The dollar hit a one-month high versus the yen on Tuesday after a Federal Reserve policy-maker was quoted as saying it was safer to err on the side of "going a little too far" in fighting inflation.

The dollar was 1 percent higher against the yen and leapt across the board against other major currencies after the Wall Street Journal quoted St. Louis Federal Reserve President William Poole in its online edition as saying that a slowing economy on its own may not reduce inflationary pressures.

That bolstered expectations that the Fed will extend its campaign of 16 straight rate rises at its next meeting on June 28-29 by raising its overnight rate to 5.25 percent.

The comments by Poole, a non-voting member of the Fed this year, echoed those of Fed Chairman Ben Bernanke, who sparked a rebound in the dollar on Monday when he said the Fed needed to be vigilant to make sure inflation stays under control.

"This is a carry-on from Bernanke yesterday, and it all suggests the Fed wants to err on the side of hawkishness when it comes to rates," said Grant Wilson, vice president at Mellon Bank in Pittsburgh. "People are putting bets back on the table for more rate hikes in June and maybe August too."

The dollar pared its gains slightly after ratings agency Standard & Poor's said on Tuesday that the United States' "AAA" credit rating could be hurt by pressure on the U.S. budget from an aging population.

But the greenback was still up 1 percent against the yen at 113.35 yen, after touching a one-month peak of 113.57 yen.

The euro was down 0.6 percent at $1.2830 as of late morning in New York, after falling to a session low of

$1.2808.

However, the euro was up 0.4 percent against the yen at 145.40 yen, nearing a record peak of 145.50 struck in April. The single currency was supported by the yen's sharp slide against the dollar, as well as by expectations that the European Central Bank will raise interest rates by as much as half a percentage point on Thursday.

The euro hit a one-year high of around $1.2980 on Monday just ahead of Bernanke's comments.

Most analysts expect the ECB to lift rates by 25 basis points to 2.75 percent at its Thursday policy meeting and to signal more credit tightening is likely in store.

Given prospects for more ECB rate rises and lingering attention on "global imbalances" -- the huge U.S. trade deficit and large surpluses in Asian countries such as China -- some analysts said it was too soon to say the dollar's woes were over.

"The dollar has come back up for air, but the market still has to be pretty cautious about milking this too much with the ECB and Friday's trade data coming up," said David Mozina, foreign exchange strategist at Lehman Brothers in New York.

The dollar is still down around 7 percent this year against a basket of six major currencies.

U.S. April trade figures are due on Friday, while the Group of Eight finance ministers meet in St. Petersburg, where they are expected to discuss the impact of high oil prices on the global economy.