Sun, Jun 25, 2006 - Page 10 News List

Greenback higher on expectations of US Fed's rate hike

AFP , NEW YORK

The dollar vaulted higher on Friday, hitting an eight-week high against the euro, amid mounting expectations of at least two more rate hikes from the US Federal Reserve in the coming months.

The euro fell to US$1.2509 at 2100 GMT from US$1.2575 late on Thursday in New York as the greenback rose to its best level since late April.

The dollar climbed to ?116.54 from ?116.10 on Thursday.

Although another quarter-point rate hike from the Federal Reserve expected on Thursday has been factored in, traders were becoming increasingly confident of at least one additional increase.

"The US dollar has found new life the last two days on expectations the Fed will keep on hiking," said Mark Ellerbeck of Scotia Capital.

"Some market participants are looking for rates to rise as high as 6.0 percent by year end from current 5.0 percent."

Analysts said the market was looking for direction from the statement accompanying the Fed's expected hike in the funds rate to 5.25 percent on Thursday.

Divyang Shah, global strategist at IDEAglobal.com, also noted that there was some market chatter over the possibility of a half-point hike, cited in the recent Fed minutes.

"Whether the Fed chooses to hike by a quarter point or a half point, the fact is that both the upside risks to inflation and downside risks to growth will ensure that the markets remain focused on risk and risk evaluation," he said.

The spike up in US rate expectations has helped support the US dollar in recent weeks because it occurred at a time when short-term yield considerations were moving in favor of the euro and the yen, with both the European Central Bank and the Bank of Japan expected to tighten policy over the coming months.

The US dollar, as well as bonds, have recently garnered support from the market's reduced appetite for risk in the light of expectations of higher borrowing costs, most evident in the slide in stock markets and commodity prices.

Fixed-income issues and the US currency have gained because they are seen as less risky assets than equities and commodities.

Friday's US durable goods data did little to calm fears about a slowdown in the US, which would have a major impact on economies elsewhere.

Figures from the Commerce Department showed orders fell 0.3 percent last month, following April's 4.7 percent decline. Analysts had expected a 0.2 percent drop.

In late New York trade, the US dollar stood at 1.2485 Swiss francs from 1.2426 Thursday.

The pound was being traded at US$1.8180 after US$1.8279 late on Thursday.

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