DEZ
FOREX-Dollar pares gains as data-driven rally loses steam
Tue Feb 14, 2006 6:18 PM GMT
Printer Friendly | Email Article | RSS
(Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 14 (Reuters) - The dollar trimmed gains on Tuesday after a rally on strong U.S. economic data failed to attract enough follow-through buying to push the currency through key technical levels.
The dollar jumped earlier on unexpectedly strong U.S. retail sales data for January, which boosted expectations of more Federal Reserve rate rises by mid-year, as reflected in the fed funds futures market. Interest rate rises are dollar-positive since they draw currency into short-term deposits.
But the rally soon lost momentum after the dollar failed strengthen past 1.18 per euro, a key level.
"Although the dollar rallied earlier, we still have some support levels that weren't broken," said Firas Askari, vice president and manager of foreign exchange trading at BMO Nesbitt in Toronto.
"You can call this a mini-range in the last couple of weeks, between $1.18-$1.21 in euro/dollar," he added.
U.S. retail sales surged 2.3 percent in January, the largest gain since May 2004. Excluding demand for automobiles, sales were up 2.2 percent, the biggest increase in more than six years.
By midday, the dollar was off its highs for the day and trading at its pre-U.S. data levels. The euro was at $1.1898 <EUR=>, nearly flat from late Monday, after falling as low as $1.1860 in the aftermath of the U.S. retail sales report.
The Swiss franc, sterling and Canadian dollar also retraced some losses against the U.S. dollar after the initial drop, traders said.
The dollar rose 0.2 percent against the Swiss franc to 1.3090 francs <CHF=>, off intra-day peaks at 1.3138 francs. The U.S. dollar fell 0.1 percent against the Canadian dollar to C$1.1545 <CAD=>, while sterling trimmed losses to $1.7340 <GBP=>.
"There is not a lot of conviction buying dollars now," said Tim O'Sullivan, trading manager at Gain Capital in Bedminster, New Jersey, who noted that the retail sales report may have been "so whacked out" that the market may have fully discounted it.
BERNANKE ON THE BRAIN
Markets remained focused on Fed Chairman Ben Bernanke's congressional appearance on Wednesday and Thursday to discuss the U.S. economy and monetary policy. Bernanke took over the reins of the Fed on Feb. 1 from Alan Greenspan.
Expectations are fairly high that Bernanke may signal the Fed will keep raising its overnight fed funds rate to 5 percent by mid-year after lifting it by 25 basis points to 4.5 percent last month, the 14th straight rise since mid-2004. The retail sales data further bolstered that view.
The interest rate futures market has moved to price in a 92 percent chance that the fed funds rate will rise to 5 percent by mid-year <FFN6> from 86 percent on Monday.
With robust U.S. economic reports so far, some economists have entertained the possibility that U.S. interest rates could go beyond 5 percent.
"With unemployment still declining, we may be entering the zone of maximum danger for upside surprises to Fed funds," said Ian Morris, chief U.S. economist at HSBC Bank USA in New York.
But few analysts expected Bernanke to be any more hawkish than what the markets have already factored in and some said the dollar could weaken later in the week on profit-taking.
"I think the risk is for a weaker dollar later this week. But through tomorrow morning, the dollar would be supported," said Jason Daw, senior G10 currency strategist at Merrill Lynch in New York.
Against the yen, the dollar was down 0.2 percent at 117.45 yen <JPY=>. The yen was stronger across the board, supported by a growing view that the Bank of Japan is close to ending its ultra-loose monetary policy. Analysts expect Japanese interest rates to rise eventually from virtually zero at present.
Analysts say this expectation has made the market's sizable short yen positions vulnerable.
Short positions refer to bets a currency will depreciate, while long positions reflect expectations it will strengthen. (Additional reporting by John Parry and Kevin Plumberg)
|
