Thu, Aug 14, 2003 page12

• US dollar rises to two-week high

  ONE-PERCENT SOLUTION Since Jan. 2001, the US Federal Reserve has cut interest rates 13 times and pledged yesterday to keep its benchmark low to spur growth

  • BLOOMBERG
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  The dollar rose to its strongest New York close against the euro since Aug. 1 after the US Federal Reserve signaled it will keep its benchmark interest rate at a 45-year low to bolster growth.

  "The Fed said the economy is improving, and rates will stay low for a long period of time -- the dollar can take encouragement from that," said Selig Sechzer, director of asset allocation in New York at Alliance Capital Management, which invests US$413 billion.

  Fed policy makers left their target for overnight bank loans at 1 percent, and said rates will stay low "for a considerable period." They remained concerned about the possibility inflation could slow further.

  The US currency advanced to US$1.1284 per euro at 5:14pm in New York from US$1.1359 late yesterday, for its strongest at the end of New York trading since US$1.1277 on Aug. 1.

  It also rose against the British pound, Swiss franc and Canadian dollar.

  The Standard & Poor's 500 Index gained 1 percent after the Fed announcement, helping support the dollar. The US currency was little changed at ?118.67 from ?118.60 yesterday.

  The Fed will probably leave its target rate at 1 percent for the rest of the year, according to analysts. It will begin to raise rates in the first quarter of next year, increasing the target to 2 percent by the final three months of the year.

  The US central bank has cut rates 13 times since January 2001 to spur the economy, which grew at a 2.4 percent annualized rate in the second quarter, up from 1.4 percent in the first.

  Fed policy is helping provide "important ongoing support to economic activity," the central bank said in its statement.

  Reports since the Fed last met in June showed that "spending is firming." At the same time, the central bank said labor market indicators are "mixed," adding that the risks to achieving sustainable economic growth are about equal.

  The dollar also rose ahead of a government report tomorrow that may give further evidence of improving consumer spending.

  Rising sales "would support those who are on the bullish end for growth expectations," said Robert Sinche, head currency strategist at Citigroup Inc.

  "It would be particularly positive for the dollar," Sinche said.

  Sinche, based in New York, said the dollar will strengthen to US$1.10 in three months, and to about US$1.07 by year-end.

  "If rates keep going up it's going to crush the stock market; that would spill over into the dollar," said Enrico Caruso, chief currency trader at hedge fund Tempest Asset Management in Irvine, California. With the Fed signaling it will keep its target rate on hold, "that'll keep rates low and help the overall situation."

  On a break of the US$1.1250 per euro level, the dollar may then strengthen to about US$1.1105 in coming days, he said.

  The message from the Fed is that economic "growth will be sustainable going forward," said Jay Bryson, chief international economist in Charlotte, North Carolina at Wachovia Corp, the fifth-biggest US bank.

  But Bryson said he's skeptical that recovery is in place yet, as there isn't enough evidence business spending is improving.

  The dollar will remain between US$1.11 and US$1.15 per euro in coming months, he said.
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