Dollar rallies as St Louis Fed chief turns hawkish
By Steve Johnson in London
Published: June 11 2004 11:45 | Last Updated: June 11 2004 11:45
The dollar rose in London morning trade on Friday after hawkish comments from William Poole, the president of the St Louis Federal Reserve.
Mr Poole told Reuters that he would be prepared to raise rates "further and faster" than is currently priced in to the markets if inflation were to "accelerate at a dangerous pace", raising the prospect that by December US rates could be above the 2.25 per cent widely expected by the market.
Furthermore Mr Poole said he thought the risk of an upside surprise to US inflation was greater than that of a downside surprise. Coming on top of a speech by Fed chairman Alan Greenspan on Tuesday, interpreted by many as hawkish, Mr Poole's words added to talk that the Fed may be about to abandon its "measured" approach to rate rises.
This triggered some observers to price in a 50-basis points hike by the Fed in August, on top of the 25 points almost universally expected later this month.
The comments "leave little doubt that the Fed is no way prepared to risk a repeat of the mistakes made back in 1994," when a perception the central bank was behind the curve led to a rout in Treasury markets," said Simon Derrick, head of currency research at Bank of New York.
The greenback rose a cent against the euro to $1.2014, Y0.5 against the yen to Y110.06 and two cents versus sterling to $1.8213, although these moves may have been exaggerated by poor liquidity with many US markets remaining closed on Friday for former president Ronald Reagan's funeral.
Sterling was soft across the board, slipping to £0.6589 against the euro after chalking up an eight-week high of £0.6546 in Asian trade, and dipping to SFr2.2863 versus the Swiss franc. Some attributed this to a degree of political uncertainty in the wake of poor local election results for the Labour party.
Mark McFarland, forex strategist at UBS, spoke of sterling vulnerability as "the market digests the future of PM [Tony] Blair and the menu of potential successors if he resigns." |
