Sun, Jun 27, 2004 - Page 10 News List

Forex traders wait for Fed to hike US interest rates

AFP , LONDON

The dollar ended the week on a steady note here as investors stayed on the sidelines ahead of next week's interest rate decision from the US Federal Reserve despite lower than anticipated first quarter economic growth in the US.

The single European currency fell to US$1.2147 in European trading, against US$1.2167 late on Thursday in New York.

The dollar lifted to ¥107.80 from ¥107.12 on Thursday.

"It's been a quiet week with the market focusing on the the Fed rate decision and uncertainty surrounding the Iraq handover," said Neil Mackinnon, chief economist at ECU Group.

Owing to the market's pre-occupation with the expected Fed rate hike on June 30, the response to revised US data was limited.

Even news that the US economy grew by less than previously expected because of higher imports failed to prompt any renewed activity.

Official figures showed that the US economy grew at an annual rate of 3.9 percent in the first quarter, slower than the 4.4 percent previously estimated.

Any effect prompted by the lower growth was offset by a ratcheting up of inflationary pressures.

Stripping out food and energy, core prices paid by consumers rose 2.0 percent, compared with the 1.2 percent increase recorded in the previous quarter.

"None of this makes a huge difference to our overall view of the economy or the Fed," said Drew Matus, financial economist at Lehman Brothers.

The market is awaiting the statement to next week's expected quarter point rate hike from the Fed to see how borrowing costs are likely to increase over the coming few months.

Expectations of a half-point hike on June 30 were massively reduced last week after relatively tame US inflation numbers and hints from Fed officials, including chairman Alan Greenspan, that the rise in US borrowing costs from their current 46-year lows of 1.0 percent will not be aggressive.

Meanwhile, the yen remained firm against the dollar, but off highs recorded earlier, as expectations of an interest rate hike in Japan diminished following weak Japanese inflation data.

News that the Japanese consumer price index (CPI) fell 0.1 percent in June prompted a re-evaluation of Japanese interest rate prospects.

A raft of strong Japanese data had raised expectations of a strong economic recovery, prompting a decline in Japanese bond prices.

In the wake of the CPI data, the Bank of Japan's governor Toshihiko Fukui indicated that it's too early for the central back to loosen policy.

Fukui was speaking after the BoJ's nine-member policy board voted unanimously at a one-day meeting today to leave its credit policy unchanged.

Meanwhile, a disappointing Ifo survey of business confidence in Germany helped the dollar recoup some losses against the euro.

Ifo's German business climate index fell to 94.6 points in June from 96.0 in May and expectations of a rise to 96.4.

"The Ifo just confirms the pattern we've seen recently in German economic data," said ECU Group's Mackinnon.

The euro was changing hands at US$1.2147 from US$1.2167 late on Thursday in New York, ¥130.98 (¥130.28), £0.6671 (£0.6665) and 1.5188 Swiss francs (SF1.5142).

The dollar stood at ¥107.80 (¥107.12) and 1.2502 Swiss francs (SF1.2447).

The pound was at US$1.8216 (US$1.8252), ¥196.35 (¥195.42) and 2.2675 Swiss francs (SF2.2714).

On the London Bullion Market, the price of an ounce of gold stood at US$401.50 from US$400 late on Thursday.

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