Dollar edges up against euro

Written by Reuters | Tokyo, June 12: | Updated: Jun 12 2008, 15:42pm hrs
The dollar edged up against the euro on Thursday, with the US currency underpinned by the Federal Reserve's array of tough talk this week about containing inflation that has spurred expectations for higher interest rates.

Helping give the dollar a broad boost, the Australian dollar tumbled nearly 1 percent after data showed the country's employment fell for the first time in 19 months.

Analysts said that investors have likely gone too far in seeing the possibility of three Fed interest rate hikes this year, especially when the economy is already grappling with a sharp housing decline and record high oil prices.

Any reassessment of how much the Fed could lift rates from 2 percent later in the year may drive the dollar lower, especially as the European Central Bank has made clear that a quarter-point rate increase to 4.25 percent may come as soon as next month.

"Markets have overshot on Fed tightening expectations," said Ashley Davies, a currency strategist at UBS in Singapore.

The dollar has staged a broad recovery as US officials have warned about the inflation threat of a weaker currency and refused to rule out intervention, partly because the dollar's slide is seen as adding fuel to the spike in crude oil.

Fed Chairman Ben Bernanke surprised investors last week by highlighting that a weaker dollar could feed inflation pressures, while several other officials have made clear their focus is now on containing inflation expectations.

The dollar climbed 0.4 percent from late US trade to 107.30 yen back near a four-month peak of 107.76 yen struck the previous day.

The euro retreated 0.5 percent to $1.5468 but remains stuck in a broad range between the record peak of $1.6020 reached in April and a low of $1.5285 hit last month.

The single currency was little changed at 166.09 yen not far from a seven-month high of 167.15 yen struck earlier this week.

The Aussie dropped about 1 percent to $0.9383.

On Wednesday the dollar slid on a renewed surge in oil prices and worries about the health of the US financial sector.

Shares of Lehman Brothers fell 14 percent on concerns about further asset write-downs and a report that the investment bank would need to raise more capital even after getting a $6 billion injection this week.

Lehman, Goldman Sachs and Morgan Stanley will report quarterly results early next week.

The latest bout of jitters over US banks and brokerages shook global stock markets.

Japan's Nikkei average shed 2.2 percent. But the drop had little impact on carry trade positions -- using the low-yielding yen as a cheap source of funds to buy higher-yielding currencies.

Market players are closely watching the performance of oil and looking ahead to Saturday's gathering of Group of Eight financial officials in Osaka, Japan, for more clues on whether the United States has changed its policy on the dollar.

Oil fell more than $1 to $135.13 a barrel after having surged $5 the previous day on US data showing dwindling stockpiles. The dollar tends to move in the opposite direction of oil prices.

The outcome of Ireland's referendum on the European Union reform treaty is also being eyed, with results expected on Friday. The rejection of the EU constitution by France and the Netherlands in 2005 was one factor behind the euro's fall that year.

But analysts were divided on whether the Irish vote would have much of an impact on the single currency this time.

"If the referendum is rejected, the euro will come under significant pressure," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.