look like poole pissed in their coffee this morning
Dollar Strengthens After Fed's Poole Suggests Faster Rate Rises
June 11 (Bloomberg) -- The dollar rose in New York, heading for the biggest weekly advance against the euro in five months, after Federal Reserve Bank of St. Louis President William Poole said the central bank may raise its key interest rate faster than some investors expect.
Poole, who votes on monetary policy, said that Fed officials are prepared to lift the rate ``further and faster'' than what is priced into financial markets if inflation accelerates. Jack Guynn, president of the Fed's Atlanta branch, suggested policy makers are willing to abandon their pledge to raise rates at a ``measured'' pace.
``The dollar's performance against the euro is a function of how much investors consider the Fed as an effective inflation fighter,'' said Stephen Jen, chief currency economist at Morgan Stanley in London, who used to work at the Fed. ``They were not sure before if the Fed had the guts to take on inflation.''
The dollar rose against all 16 major currencies tracked by Bloomberg today. Against the euro, the dollar rose to $1.2014 at 11 a.m. in New York, from $1.2106 late yesterday, according to EBS, an electronic foreign-exchange dealing system. It gained to 110.13 yen from 109.34.
Contrast to Europe
``A more accelerated pace of tightening in the U.S. stands in contrast to what's going on in Europe, where rates appear to be on hold,'' said Karl Halligan, chief currency trader in New York at CIC, the investment-banking arm of CIC Group. ``The euro will suffer, and the dollar will benefit, going forward.'' He said the dollar may strengthen to $1.1750 in coming days.
On the week, the dollar is up 2.2 percent against the euro. It is down 1 percent versus the yen. This quarter, the dollar is up against all major currencies except the Swiss franc.
U.S. stock and bond markets are closed today for former President Ronald Reagan's funeral in Washington.
The comments by Poole and Guynn, in conjunction with those made by Chairman Alan Greenspan earlier in the week, suggest that the Fed will bring its target rate more in line with the 2 percent target of the European Central Bank as inflation in the U.S. accelerates. Poole spoke in an interview with Reuters.
Among the regional Federal Reserve bank presidents, the New York branch president always votes on the Federal Open Market Committee, which decides Fed monetary policy. The other presidents rotate for four voting slots each year. Guynn doesn't vote this year. Sandra Pianalto of the Cleveland Fed branch, who speaks today in Pennsylvania, is a voting member.
Jean-Claude Trichet, the ECB's president, said this week that low inflation in the 12-nation euro region persuaded bank officials to hold their key rate at 2 percent at a meeting earlier this month.
June Meeting
Jen, who is also a former International Monetary Fund official, raised his forecast for the dollar against the euro to $1.13 by the end of next year, from $1.20 previously. Versus the yen, Morgan Stanley predicts the dollar to rise to 115 by the end of 2005, compared with a decline to 93 yen before.
At 1.3 percent, the yield on the July federal funds futures contract suggests that traders see a 100 percent probability of a quarter-percentage point rate increase at the Fed's June 29-30 meeting.
Economists at 10 of the 23 primary U.S. government securities dealers that trade with the Fed's New York branch said the so-called federal funds rate will be 2 percent by year-end, according to a Bloomberg News survey. Futures show that the target may rise to 2.25 percent by year-end.
Barclays Capital Inc. and J.P. Morgan Chase & Co. are among four firms saying it will be 2.25 percent. Barclays forecasts a quarter percentage-point increase this month and half-point boosts in August and November.
Inflation Signs
A government report yesterday showed that U.S. import prices rose 1.6 percent in May, the most in 15 months and twice the median prediction among economists surveyed by Bloomberg News. Prices rose 0.2 percent in April.
Next week, the government is expected to say that consumer price inflation, less food and energy, rose 2.9 percent in the 12 months ended in May, according to the median forecast of economists surveyed by Bloomberg News. The estimate compares with a 2.3 percent increase in the 12 months ended in April.
``Comments from the Fed suggest they are wary of a pick-up in inflation -- investors are taking that to mean interest rates are set to rise more than expected,'' said Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc. ``The dollar has continued to benefit from that.''
The dollar's gain against the yen accelerated after it breached 109.50-60, a level where automatic orders to sell the yen had been placed, said Akira Gomikawa, vice president of the foreign exchange division in Tokyo at Mizuho Corporate Bank Ltd.
Japanese Recovery
The yen was still headed for its third weekly gain in four against the dollar on expectations Japan's economic recovery is accelerating, luring investors into the country's assets.
Japan's industrial production rose a revised 3.5 percent, up from a previous estimate of 3.3 percent, the government said. Machinery orders in April had their biggest gain in six months, a report yesterday showed, a day after the government boosted its estimate for first quarter growth.
Ten-year government bond yields have more than quadrupled from a record low in the past year and the Nikkei 225 Stock Average rose to a six-week high yesterday. The Nikkei fell 0.4 percent today.
``Yen buying has picked up,'' said Toru Umemoto, market analyst in Tokyo at Keio University's Global Security Research Center, which is headed by Eisuke Sakakibara, former vice finance minister for international affairs. ``The economic data have been very good. As international investors come back into the Nikkei, the yen could rise even further.''
Japan's currency will gain as rising yields on bonds entice domestic investors to keep money in the country, said Citigroup Inc., Deutsche Bank AG and Barclays Capital Inc., three of the top 10 currency-trading firms. Sumitomo Mitsui Banking Corp. echoed the recommendation.
The yen may reach 108 per dollar in three months, 104 in six months and 102 in 12 months, said Robert Sinche, head of currency strategy at Citigroup, the third-largest currency trader in a Euromoney magazine survey.
To contact the reporter on this story:
Steve Rothwell in London at srothwell@bloomberg.net
To contact the editor responsible for this story:
Daniel Moss at dmoss@bloomberg.net
Last Updated: June 11, 2004 11:05 EDT |
