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Tuesday, June 10, 2008

Forex: Dollar Rises Versus Yen, Euro

The dollar rose to a three-month high against the yen and climbed versus the euro after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise. Bernanke said late yesterday that the central bank will ``strongly resist'' any waning of public confidence in stable prices. ``Strong'' economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.

"The Fed and the Treasury have signaled what they want: a stronger dollar,'' said Jeff Gladstein, global head of foreign- exchange trading at AIG Financial Products in Wilton, Connecticut. "There's potential for dollar appreciation.'' The dollar rose to 107.14 yen, the highest since Feb. 27, at 10:29 a.m. in New York, from 106.31 yesterday. Against the euro, the dollar climbed to $1.5509, from $1.5646. Japan's currency traded at 165.88 per euro from 166.33 yesterday.

Futures on the Chicago Board of Trade show a 55 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 9 percent the previous day. The contracts show a 95 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.

The dollar has fallen 11 percent against the euro and 7.2 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent.

China Talks

"The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said in a speech at a Boston Fed conference. "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

The Fed is "aware'' that the weak dollar boosts inflation, Dallas Fed President Richard Fisher said in response to questions after a speech at the Council on Foreign Relations in New York today.

Paulson repeated comments made yesterday that currency intervention is a tool for policy makers. He also urged China to loosen government controls on energy prices and the value of the country's currency.

The yuan traded near the highest level since a dollar peg was scrapped in 2005. The currency was little changed at 6.9255 per dollar in Shanghai, compared with 6.9230 on June 6, according to the China Foreign Exchange Trade System.
Central Bank Focus

Canada's dollar gained as the Bank of Canada unexpectedly kept interest rates unchanged at 3 percent because energy prices may push inflation past the top of its target band later this year. The loonie strengthened to C$1.0204 per U.S. dollar from C$1.0233 yesterday after touching 1.0323 before the rate announcement, the lowest in more than two months.

"The focus of the Fed and now the Bank of Canada has gone from preventing a second depression to all of a sudden inflation is an issue,'' said Win Thin, a currency strategist with Brown Brothers Harriman & Co. in New York. ``That's good for the dollar.''

The U.S. dollar climbed to 94.59 cents per Australian dollar, the highest since May 16, before trading at 94.75 cents. Against the New Zealand dollar, the U.S. currency gained to 75.49 cents, near the strongest in a month. The British pound slid to $1.9563 from $1.9751 after data showed U.K. house prices dropped in May.

Trade Deficit

A report today showed that the U.S. trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years. The gap grew 7.8 percent to $60.9 billion the Commerce Department said.

The Standard & Poor's 500 Index fell 0.7 percent and the two-year U.S. Treasury yields rose 16 basis points to 2.87 percent. The yield advantage of a German two-year bund over a comparable Treasury has narrowed to 1.81 percent from 2.26 percent on June 6.

Finance ministers of the Group of Eight industrialized countries may consider joint action to deflate the price of oil and prop up the dollar at their meeting June 13-14 in Japan, said DBS Group Holdings Ltd. in a report to clients.

The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.

The greenback dropped 1.4 percent against the euro last week, the most since March, after Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation and the U.S. Labor Department reported the next day that the jobless rate increased the most in May in more than two decades. Crude oil today climbed to $137.98 a barrel in New York. The price more than doubled in the past year.

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