Dollar Weakens as Fed's Minutes Likely to Show Rates Near Peak
The dollar weakened for a second day on speculation minutes of the Federal Reserve's last meeting released today will show policy makers considered stopping a two-year campaign of interest-rate increases.
Ending the policy of raising borrowing costs may dull the appeal of U.S. assets compared with those of Europe and Japan, where central banks are lifting rates. The dollar yesterday fell the most in three weeks against the euro and dropped versus the yen after Chairman Ben S. Bernanke in testimony to Congress signaled the Fed was wary of pushing rates too high.
``The dollar has peaked out, buffeted by dwindling expectations of further Fed rate increases,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research, a unit of Daiwa Securities Group Inc., Japan's second- largest brokerage. ``The minutes may reaffirm the Fed is concerned about an economic slowdown caused by higher rates.''
The dollar dropped to $1.2611 per euro at 11 a.m. in Tokyo from $1.2587 in late New York yesterday. It fell to 116.72 yen from 116.89. The dollar today declined against 14 of the 16 major currencies tracked by Bloomberg. It may fall to 113 yen and $1.28 versus the euro this month, Kameoka said.
The Fed has lifted its overnight lending rate between banks 17 straight times to 5.25 percent to limit inflation. The minutes will reveal policy makers' deliberations at their last meeting on June 29.
`Future Effects'
In the text of testimony to Congress in Washington yesterday, Bernanke said the central bank must be wary of taking borrowing costs too far and ``account of the possible future effects of previous policy actions.'' He said the economy is ``in a period of transition'' as consumer spending slackens, though he doesn't foresee a recession.
Kansas City Fed President Thomas Hoenig in a speech yesterday to a business group in Omaha, termed the Fed's current target rate ``somewhat restrictive.''
Interest-rate futures suggest a 65 percent chance the Fed will boost the rate a quarter-point to 5.5 percent on Aug. 8. The odds were 85 percent before Bernanke's comments.
``It does really suggest we're off the 25 basis-point hike per meeting'' pace, said Greg Gibbs, senior currency strategist at ABN Amro Holding NV in Sydney. ``The currency is trading off the back of the interest-rate differentials. We'll see the dollar weaken a bit.''
Middle East Conflict
Gains in the euro may be limited by escalating military tension in the Middle East, said Nobuaki Tani, a senior currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth- largest lender by assets.
Israeli soldiers yesterday fought Hezbollah forces within southern Lebanon for the first time since the conflict began July 12, as the U.S. and Israel resisted diplomatic efforts to halt the hostilities. Israeli officials said the threat from Hezbollah dictated more military action.
``Europe is geographically close to the Mideast conflict,'' Tani said. ``This concern will continue to weigh on the euro, supporting dollar-denominated assets'' as a safe haven.
The euro may move between $1.2550 and $1.2650 against the dollar today, Tani said.
The euro also may be supported by speculation the European Central Bank will raise interest rates faster than the Fed.
Producer prices in Germany, Europe's largest economy, rose 6.1 percent from a year earlier, the Federal Statistics Office said yesterday, fueling expectations the ECB will step up rate increases. A gain of 5.9 percent was forecast, according to a Bloomberg survey.
`Speed Up'
The yield on the benchmark German two-year bond, among the most sensitive securities to interest-rate expectations, yesterday hit the highest in a week.
The ECB has raised rates three times since December, last lifting its refinancing rate to 2.75 percent on June 8.
``There are expectations the ECB will speed up the pace of raising rates this year,'' said Masafumi Yamamoto, a strategist at Nikko Citigroup Ltd. and a former Bank of Japan currency trader. ``They have raised rates once every three months, but they may do so every two months after a rate hike in August. This is supportive for the euro,'' which may rise to $1.27 versus the dollar this month.
The ECB will lift its benchmark to 3 percent on Aug. 3, according to all but one of the 22 economists surveyed by Bloomberg. By Bloomberg
Ending the policy of raising borrowing costs may dull the appeal of U.S. assets compared with those of Europe and Japan, where central banks are lifting rates. The dollar yesterday fell the most in three weeks against the euro and dropped versus the yen after Chairman Ben S. Bernanke in testimony to Congress signaled the Fed was wary of pushing rates too high.
``The dollar has peaked out, buffeted by dwindling expectations of further Fed rate increases,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research, a unit of Daiwa Securities Group Inc., Japan's second- largest brokerage. ``The minutes may reaffirm the Fed is concerned about an economic slowdown caused by higher rates.''
The dollar dropped to $1.2611 per euro at 11 a.m. in Tokyo from $1.2587 in late New York yesterday. It fell to 116.72 yen from 116.89. The dollar today declined against 14 of the 16 major currencies tracked by Bloomberg. It may fall to 113 yen and $1.28 versus the euro this month, Kameoka said.
The Fed has lifted its overnight lending rate between banks 17 straight times to 5.25 percent to limit inflation. The minutes will reveal policy makers' deliberations at their last meeting on June 29.
`Future Effects'
In the text of testimony to Congress in Washington yesterday, Bernanke said the central bank must be wary of taking borrowing costs too far and ``account of the possible future effects of previous policy actions.'' He said the economy is ``in a period of transition'' as consumer spending slackens, though he doesn't foresee a recession.
Kansas City Fed President Thomas Hoenig in a speech yesterday to a business group in Omaha, termed the Fed's current target rate ``somewhat restrictive.''
Interest-rate futures suggest a 65 percent chance the Fed will boost the rate a quarter-point to 5.5 percent on Aug. 8. The odds were 85 percent before Bernanke's comments.
``It does really suggest we're off the 25 basis-point hike per meeting'' pace, said Greg Gibbs, senior currency strategist at ABN Amro Holding NV in Sydney. ``The currency is trading off the back of the interest-rate differentials. We'll see the dollar weaken a bit.''
Middle East Conflict
Gains in the euro may be limited by escalating military tension in the Middle East, said Nobuaki Tani, a senior currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth- largest lender by assets.
Israeli soldiers yesterday fought Hezbollah forces within southern Lebanon for the first time since the conflict began July 12, as the U.S. and Israel resisted diplomatic efforts to halt the hostilities. Israeli officials said the threat from Hezbollah dictated more military action.
``Europe is geographically close to the Mideast conflict,'' Tani said. ``This concern will continue to weigh on the euro, supporting dollar-denominated assets'' as a safe haven.
The euro may move between $1.2550 and $1.2650 against the dollar today, Tani said.
The euro also may be supported by speculation the European Central Bank will raise interest rates faster than the Fed.
Producer prices in Germany, Europe's largest economy, rose 6.1 percent from a year earlier, the Federal Statistics Office said yesterday, fueling expectations the ECB will step up rate increases. A gain of 5.9 percent was forecast, according to a Bloomberg survey.
`Speed Up'
The yield on the benchmark German two-year bond, among the most sensitive securities to interest-rate expectations, yesterday hit the highest in a week.
The ECB has raised rates three times since December, last lifting its refinancing rate to 2.75 percent on June 8.
``There are expectations the ECB will speed up the pace of raising rates this year,'' said Masafumi Yamamoto, a strategist at Nikko Citigroup Ltd. and a former Bank of Japan currency trader. ``They have raised rates once every three months, but they may do so every two months after a rate hike in August. This is supportive for the euro,'' which may rise to $1.27 versus the dollar this month.
The ECB will lift its benchmark to 3 percent on Aug. 3, according to all but one of the 22 economists surveyed by Bloomberg. By Bloomberg
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