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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (26127)	3/22/2005 8:25:49 AM
From: Haim R. Branisteanu	Respond to of 116555

22 Mar 2005 13:06 GMT - Forex - Dollar near 20-day euro highs ahead of expected Fed rate hike LONDON (AFX) - The dollar remained near 20-day highs against the euro on speculation the US Federal Reserve will warn of higher inflation risks in the statement accompanying tonight's expected quarter-point interest rate rise. Though the Fed is set to lift its key repo rate to 2.75 pct, the market is awash with talk the rate-setting body will remove the "measured" rhetoric from its statement, implying bolder rate hikes in the months ahead. Most analysts doubt that the Fed will change its language just yet given the tentative pick-up in US labour market conditions and the recent softening in business surveys. Unchanged rhetoric could then put the dollar under pressure, at least initially, they added. "We expect the term 'measured' to remain in the statement which would probably also be somewhat dollar negative," said Clyde Wardle, currency strategist at HSBC USA. Further pressure, said Wardle, may emerge with this afternoon's US producer price data, where he sees downside risks. "If we are correct, then the dollar may start to give back some of its recent gains," said Wardle. The consensus of analysts' projections is for the producer price index to remain steady at 0.3 pct in February, with the core rate sliding to 0.1 pct from 0.8 pct. Even without a change in the language of the Fed statement this evening, the rate differential on the dollar and its major competitors is widening. For example, before the Fed started raising its key Fed funds rate last summer, the cost of borrowing in the US, at 1.00 pct, was 1 percentage point lower than the European Central Bank. Now US interest rates are set to rise 2.75 pct, compared with the 2.0 pct refi rate in Europe. Under normal circumstances that should help lift the dollar, but the more buoyant economic outlook in the US may only exacerbate concerns surrounding the US current account deficit and the recent dollar rally may prove short-lived. "The dollar has seen little benefit thus far this year from adjustment in Fed expectations as structural themes dominate and a shift to more risk averse market posture could actually exacerbate current account funding concerns," Daniel Katzive, an analyst at UBS. The dollar was in the doldrums for much of last year due to concerns over the US twin deficits combined with talk that many central banks will move currency reserves away from the US currency, but a degree of focus on the US' relative economic outperformance have helped prop up the dollar. Meanwhile, the pound was on the backfoot after inflation data in the UK diminished any expectations that the Bank of England will raise the cost of borrowing next month. Official figures showed that the annual CPI inflation rate was unchanged for the third month running at 1.6 pct in February, below the consensus forecast of analysts for an increase to 1.7 pct. London 1242 GMT London 0837 GMT