Forex - Dollar firmer after FOMC confirms US rate hikes to continue
07.01.2005, 05:43 AM
LONDON (AFX) - The dollar was firmer against major currencies after last night's Federal Reserve Open Market Committee raised US interest rates to 3.25 pct and confirmed that monetary tightening will continue to rise at a measured pace.
The rate hike was fully expected, but the dollar rallied on the back of the accompanying statement which removed fears that the Fed could soon take a pause in raising rates.
'The 25 basis point rate hike at the FOMC meeting yesterday was no surprise nor was the repeat of the 'measured' pace comment, but some had looked for signs that the Fed is close to ending its rate hike cycle,' said CALYON analyst Mitul Kotecha.
He said the dollar is likely to find further support from the Fed statement, sufficient to push the euro below 1.20 usd in the coming days, due to favourable US interest rate spreads -- given that the next moves in the euro zone and the UK are set to be down.
'The Fed revealed no signs of being close to putting the brakes on further rate hikes in the months ahead,' he said. The dollar rose across the board, with the yen unable to benefit from an upbeat Tankan report which showed widespread improvement in Japanese business sentiment.
The euro also failed to capitalise on a survey showing an improvement in manufacturing sector activity in June. The purchasing managers' index for the 12-nation single currency zone rose to 49.9 in June from 48.7 in May, still showing a contraction but well above analysts' expectations for a more modest rise to 49.0.
Meanwhile, the pound remained weak after a string of very disappointing data over the past few days intensified speculation that the Bank of England will cut interest rates as soon as August.
'Sterling has remained under pressure as the weakness in UK data persists,' said HBOS currency analyst Steve Pearson.
Short sterling contracts indicate that the market has fully discounted two rate cuts this year, with a third now partially priced-in, whilst the spread between UK and euro zone short-term interest rates continues to narrow, he added.
Yesterday saw a sharp and unexpected downgrade in UK first quarter GDP and a weak consumer sentiment survey add to the negative sentiment prompted after Wednesday's dismal retail sales survey from the Confederation of British Industry.
Today will see the release of the latest purchasing managers index on UK manufacturing activity.
Given that the latest German IFO and Japanese Tankan surveys have begun to show some signs of improvement, however, there is a good chance the UK report could beat expectations and prompt a slight rebound for sterling, Pearson said.
Source:http://www.forbes.com/
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