Fed raised interest rate to 3.0%, but said that long-term U.S. inflation remained contained. It also referred to recent weak economic data from the United States.
TJ: Economy is going to a halt.
Dollar weakens on dovish Fed
May 04, 2005 00:26:00 AM ET
By Rajat Bhattacharya
SINGAPORE (Reuters) - The dollar headed toward a six-week low against the yen and lost half a percent against the euro on Wednesday after the U.S. Federal Reserve raised rates but sounded less hawkish than markets had expected.
The dollar was also driven lower against the yen and other currencies on growing speculation China may relax controls over its currency in the coming days and let it appreciate.
The dollar weakened by a quarter percent from late New York levels to 104.79 yen at 0208 GMT, closing on a six-week low of 104.57 hit on Friday. The U.S. currency fell to $1.2947 per euro from $1.2874 in late New York trading. The Fed on Tuesday raised its key interest rate to 3.0 percent, the eighth rise in as many meetings, but said that long-term U.S. inflation remained contained. It also referred to recent weak economic data from the United States.
Several analysts said the Fed's statement was less aggressive compared with previous statements.
``You can say that the statement was slightly dovish than the previous one,' said Uwe Parpart, senior strategist at Banc of America Securities in Hong Kong.
``But the difference is very marginal. The Fed will continue to raise rates in a measured pace.'
Standard Chartered currency strategist Callum Henderson said while the market still expects the Fed to raise rates in a measured pace, a slowdown in global growth implies that the Fed may pause earlier than expected.
``Global growth is slowing,' Henderson said. ``The Fed will have to stop (raising rates) at some point. That, along with speculation on the Chinese yuan, is driving markets today.
Investors continued to speculate that China may change its currency regime and let the yuan trade in a wider band during or just after this week's Labour Day holidays in China.
That speculation -- triggered last month by comments from China's central bank governor who said there were no serious political or technical obstacles to a change -- drove the premium on one-month and three-month yuan non-deliverable forwards to record highs in late Asian trading on Tuesday.
``There's ongoing speculation something may happen next Monday. That's providing some support for the yen and other Asian currencies,' said Parpart.
``It's quite possible that China will make a move in the near future. They're technically ready. But we think it's likely to happen in the third quarter, instead of next Monday.'
Parpart said the surge in shorter dated yuan premiums, which factored in a 2.7 percent appreciation in the Chinese currency in three months, was exaggerated because China's authorities were unlikely to let the yuan appreciate to that extent so soon. |
