Friday, November 25, 2005

Dollar mixed as markets reassess Fed minutes

NEW YORK (AFP) - The dollar steadied a day after a sharp drop as traders reassessed minutes published by the Federal Reserve seeming to point to an end to the cycle of interest rate rises in the United States.

The euro edged up to 1.1820 dollars at 2200 GMT from 1.1814 dollars late on Tuesday in New York.

The dollar fetched 118.70 yen from 118.72 yen on Tuesday.

Traders were rethinking the slide in the greenback on Tuesday that came in response to market-moving comments from the Federal Reserve in minutes released from its November 1 policymaking meeting.

The minutes revealed that some members had warned against raising interest rates too much, prompting predictions that the Fed may soon bring a halt to its tightening policy, which began in the summer of 2003.

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But Boris Schlossberg at Forex Capital Markets said it may be too soon to call an end to the rate-boosting cycle that has widened the yield gap and lifted the dollar.

"The reaction in the FX market may be a bit premature," Schlossberg said.

"US economic growth continues to impress for the time being with consumer spending remaining strong. The key to near term Fed policy will be the upcoming Christmas season."

Schlossberg said a key retail trade group raised its holiday forecast to show a 6.0 percent rise in spending from a 5.0 percent estimate, suggesting US consumer spending and the overall economy is robust.

He said the Fed could still keep raising its base rate, currently at 4.0 percent: "5.0 percent US rates are not out of the question and in that case the dollar bull run will likely continue," he said.

Mark Vitner at Wachovia Securities said the Fed comments "probably do not reflect as much of a change as has been widely reported."

Vitner said the Fed remains poised to hike interest rates at the next two meetings on December 13 and January 31, "and will likely hike them another quarter percentage point at their March 28 meeting, bringing the federal funds rate up to 4.75 percent by the end of the first quarter."

But he added, "The financial markets have become less certain on this final point, and the federal fund futures now assign only about a 30 percent probability of a rate hike in March as compared to more than 70 percent prior to the release of the minutes."

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Other analysts said the dollar may have peaked for the time being with the market looking ahead to an end to the increases in US rates.

"The Fed could revise its statement as soon as next month's meeting by stating a more specific time limit for the tightening campaign, to lend some finality to the conclusion of the rate hikes," said Ashraf Laidi, chief currency analyst with MG Financial Group.

Financial markets still put strong odds on two more US rate increases, in December and January.

Even if that means US interest rates will top at 4.5 percent, well above the anticipated 2.25 percent in the euro-zone, markets will tend to unwind bullish dollar positions taken during the past two months in particular, said Laidi.

"The combination of renewed acceleration in the US trade deficit, with the looming conclusion of the Fed's tightening campaign, could pave the way for the next dollar decline," he said.

In late New York trade, the dollar stood at 1.3112 Swiss francs from 1.3105 Tuesday. The pound was being traded at 1.7233 dollars after 1.7222.

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