NEWS / Monetary Policy

FOREX-Dollar gains on rivals, inflation front and center

FOREX-Dollar gains on rivals, inflation front and center
Tue Jun 6, 2006 4:24pm ET13

(Updates prices, adds Hoenig reference)

By Steven C. Johnson

NEW YORK, June 6 - The dollar gained across the board 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 hit a one-month high against the yen 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 had most market participants betting the Fed will extend its campaign of 16 straight interest rate rises by lifting its overnight rate to 5.25 percent at its next meeting on June 28-29 from the current 5 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 after he said the Fed needed to be vigilant to make sure inflation stays under control.

"Poole put the icing on Bernanke's cake, and the Fed is saying it would rather combat inflation at the expense of a slowdown rather than the other way around," said Ashraf Laidi, chief currency analyst at MG Financial Group in New York.

Indeed, in separate remarks on Tuesday, Fed Governor Susan Schmidt Bies said the U.S. central bank was trying to walk a tightrope between high inflation expectations and a slower growth outlook, adding that makes it hard to know how many more rate hikes will be needed.

By late afternoon, the greenback was up 0.87 percent against the yen at 113.21 yen, after touching a one-month peak of 113.57 yen.

The euro was down 0.54 percent at $1.2835, after falling to a session low of $1.2808.

Against the yen, the euro was up 0.32 percent at 145.32 yen , supported by the Japanese currency's sharp slide against the dollar and expectations that the European Central Bank will lift rates by a quarter percentage point to 2.75 percent at its Thursday policy meeting and signal more credit tightening in store.

LINGERING UNCERTAINTY

The dollar pared its gains modestly in late trade, a move some traders tied to comments by Kansas City Fed President Thomas Hoenig that higher rates take time to have an effect.

Hoenig said core prices were running near the upper end of his comfort zone but that easing energy prices should alleviate price pressures.

A shift out of U.S. stocks, which fell for the second straight day, and into Treasuries was also seen slowing the dollar's gains Tuesday, analysts said.

Overall, though, uncertainty about Fed intentions and inflation was keeping investors off-balance. The dollar's recent gyrations -- it tumbled Friday on soft U.S. jobs data only to rebound sharply this week on the hawkish Fed comments -- reflect this, said Tim O'Sullivan, chief trader at Gain Capital in Bedminster, New Jersey.

Indeed, Fed funds futures were pricing in an 80 percent change of a 17th straight rate hike in June, up sharply from 48 percent on Friday.

Still, given prospects for more ECB rate rises and lingering attention on the huge U.S. trade deficit, some 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 (U.S.) trade data coming up," said David Mozina, foreign exchange strategist at Lehman Brothers in New York. U.S. April trade figures are due out on Friday.

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