Sun, May 16, 2004 - Page 10 News List

Interest rates and oil prices join to push dollar lower

AFP , NEW YORK

The dollar swung mostly lower Friday as US economic data combined with a jump in crude oil prices to a new record prompted traders to push back forecasts for Federal Reserve rate hikes.

The euro rose to US$1.1885 from US$1.1818 late on Thursday in New York.

The dollar was being traded at ¥114.24 from ¥114.52 on Thursday.

In earlier London trading, the US unit had surged to ¥114.77, its highest level since Sept. 19, last year, with analysts predicting a break above ¥115. But the rally faded in later action.

Despite a report on consumer inflation that some economists called worrisome, market participants focused on a weaker-than-expected University of Michigan index of consumer sentiment report and jump in oil prices that could put the Fed on hold.

And weakness on Wall Street also could dissuade the Fed from any aggressive moves, analysts said.

"Soaring gasoline prices, Iraq worries, sliding stocks, and a surge in interest rates can weigh on household moods, and in this case managed to cancel out the beneficial impact of news of job growth and strong economic activity," said Steve Stanley, an economist with RBS Greenwich Capital.

The Michigan consumer sentiment measure registered 94.2 in early May, unchanged from its final April number and countering expectations for an improved reading to 95.9.

Many analysts still see the Fed boosting rates by 25 basis points in June, but the overall pace of increases after that is subject to speculation.

"While there is substantial risk, as the Fed indeed may want to get a hike out of the way ahead of the elections, we don't think a move is a foregone conclusion," said analysts at Web-based research firm Action Economics.

Rising inflation risks would prompt the Federal Reserve to raise interest rates sooner rather than later, and narrow the yield differential between dollar-based assets and those of higher-yielding currencies.

First, the markets had to digest a government report showing underlying consumer prices climbing steadily but not markedly beyond expectations.

Overall consumer prices rose a modest 0.2 percent in April from the previous month, pushing up prices 2.3 percent when compared to last year.

Core prices, stripping out energy and food, rose 0.3 percent in April from the previous month, a little higher than had been predicted by private economists.

The report indicates "that the upturn in underlying inflation can no longer be ignored," said Anthony Karydakis at Bank One.

"With core inflation running at a 3.3 percent annual rate in the last three months, the pressure on the Fed to show responsiveness by tightening in June is growing steadily," Karydakis said.

"We expect a 25-basis-point move at the June meeting," he said.

Robert Sinche at Citibank said the latest economic data "is likely to be met with a 25 basis-point Fed funds rate hike at the June 30 meeting and two additional hikes by year-end."

But he said many market participants are already pricing in "a more rapid pace of tightening," that could push the Fed funds rate from one percent to 2.5 percent or higher early next year.

"Fed officials have been trying to convince the market that they will be raising rates `at a measured pace,' but the market sees a replay of 1994 when the Fed raised the funds rate by 300 basis points in 12 months," added Merrill Lynch economist David Rosenberg.

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