FOREX-Dollar firm as markets await Fed hike, statement

FOREX-Dollar firm as markets await Fed hike, statement
Thu Jun 29, 2006 6:02am ET169

(Updates price, adds quotes, changes byline)

By Toni Vorobyova

LONDON, June 29 - The dollar hovered near a 2-month high against the yen and ticked up versus the euro on Thursday as investors awaited a U.S. interest rate hike and signals on future tightening from the Federal Reserve.

The Fed is widely seen lifting overnight rates for a 17th straight policy meeting to 5.25 percent from 5 percent at 1815 GMT. But investors are keen to hear what the central bank says in its statement about its next meeting in August.

Analysts say the key will be how the Fed plans to deal with concerns about inflation at a time when the U.S. economy is showing signs of softness.

"The market is pretty much in a holding pattern. A 25 basis point (rate rise) is a done deal, so the statement is the key. We expect the Fed to say the economy is slowing to a sustainable level but there is elevated inflationary pressure," said Stuart Ritson, currency strategist at Rabobank.

"The Fed is expected to leave the door open for an August hike and that should underpin the dollar, but not boost the dollar."

By 0956 GMT, the dollar was nearly flat on the day at 116.42 yen , just below a two-month high of 116.70 hit this week.

Against the euro, it gained nearly a quarter percent to $1.2525 , edging back towards last week's two-month high at $1.2476.

The euro was down slightly at 146.00 yen , off a record high of 146.65 set this week.

ROOM FOR EURO RECOVERY NEXT WEEK?

The market is keen to see if the Fed tweaks its wording compared with its May statement which said further policy tightening may yet be needed to stem inflationary pressures, but that such action would depend on the economic outlook.

With expectations having increased in recent weeks for another rate rise in August, anything that suggests the Fed could hold off from tightening then might spur dollar selling, analysts said.

Because of the Fed vigil, the euro has been unable to benefit from hawkish rhetoric from European Central Bank policymakers this week which have boosted expectations for more euro zone rate hikes from the current 2.75 percent. ECB President Jean-Claude Trichet speaks in Munich at 1345 GMT.

"When you look at evidence on positioning, people are still long euro/dollar so at the margin there may be some slippage going in to the (Fed) announcement," said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation.

"(But) I am not sure that the Fed is going to tell us anything completely new ... You could get a bit of a euro/dollar recovery going into next week, simply because there will be some refocusing on the ECB meeting," he added.

The ECB is expected to leave interest rates on hold at a meeting next week.

The New Zealand dollar held above a two-year low of US$0.5920 hit on Wednesday after an unexpected rise in the trade deficit triggered a sharp selloff in the currency.

The Norwegian crown hit one-week highs against the euro and the dollar , boosted by strong retail sales and low unemployment data and ahead of a Norges Bank rate decision at 1200 GMT.

The bank is widely seen holding rates at 2.75 percent but economists expect it to sound a more hawkish tone, signalling more rate hikes in coming months.

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