Dollar at two-week high as Fed decision looms ahead

London, May 15: THE dollar pushed to two-week highs against the yen and held near one-month peaks against the euro on Tuesday, as traders awaited the Federal Reserve’s policy-setting meeting later in the day.
The dollar has gained over two per cent against the yen and the euro in a little over a week amid confidence the Fed will guide the US economy to a soft landing.

In a Reuters poll taken last week, all but one of the 25 primary dealers of US government securities predicted the Fed would cut its overnight lending rate by half a percentage point to 4.0 per cent. The Fed is due to announce its decision around 1815 GMT.

“The Fed has already been quite aggressive and proactive in reacting to evidence of a serious economic slowdown,” said Neil MacKinnon, senior currency strategist at Merrill Lynch. “That has encouraged investors’ confidence that any downturn in the US economy will not be prolonged and that is why the dollar has been so resilient.”

Comments from US treasury secretary Paul O’Neill on Monday that he was not worried by the dollar’s relative strength helped underpin the US currency, which rose to highs above 123.40 yen . Japanese demand for short-dated US Treasuries also fuelled the move, dealers said. Strong US retail sales and the consumer sentiment data on Friday has already sparked some hopes the US economy will see a speedy recovery, underpinning demand for the dollar.

The euro pushed to the day’s highs above $0.8750 after data showed Italy’s economy may be growing slightly faster than expected. But it remained within firing range of Monday’s one-month lows and little over half a cent from its lowest level this year.

Italian gross domestic product grew at an annualised 2.3 per cent in the first quarter, above the median forecast of 2.2 per cent.”The Italian GDP number was better than the market was looking for, which offered the euro some support, but it is likely to be stuck in a tight range ahead of the US rate announcement,” said Francesca Fornasari, currency strategist at Lehman Brothers.

The euro has lost around two cents against the dollar since the European Central Bank’s apparent U-turn on interest rates last Thursday. Dealers said a lack of credibility in the ECB has weighed on the euro at a time when confidence in the Fed is riding high.

ECB chief economist Otmar was quoted in a German newspaper on Tuesday as saying the bank’s quarter-point rate cut last week pre-empted rate speculation that would have otherwise occurred. (Reuters)