Jan

10

Talk about a pseudo event scheduled for 12:30 pm EST! This one would seem to be a classic. There is concern that during an interview, someone, whose duty is to keep inflation down, will state that he is concerned with inflation. Another fed personage said, "it was too early to relax." Has anyone at the Fed ever said that we should relax and let inflationary expectation take its course, and that we, Governors, are not important at all? If oil had been going up, we could have expected them to say that they were seeing some upside risks from energy price spillover. But energy is down ten percent and the commodity indexes are at one year lows. Forget that. That's not a pseudo event. A senior currency strategist, doubtless with a position at a bank, says that the dollar will rise to 129 euro within a week. Former Fed Chair, Alan Greenspan, has also weighed in, and said that he sees signs of reacceleration if the current governors don't do their job. The speech will be in Iowa and it is anticipated that he will say something hawkish. If he says it, will that have an impact? All we need are ghosts to try and fan the flames and talk about Saudi or Venezuela being down or terrorism threats in Boston or Asia or such pseudo events on Drudge et al and we'll have another opportunity for reality lovers.

Dollar Rises to 7-Week High Versus Euro on Inflation Concerns

2007-01-09 21:23 (New York)

By Chris Young and Kosuke Goto Jan. 10 (Bloomberg) — The dollar rose to an almost seven-week high against the euro on speculation Federal Reserve Bank of Chicago President Michael Moskow will today reiterate concern about inflation. The U.S. currency also held near a two-month high against the yen as traders reduced bets the Fed will cut its key interest rate this quarter. Signs of a stronger labor market prompted Fed Vice Chairman Donald Kohn this week to say it was “too early to relax'' on inflation. Former Fed Governor Alan Greenspan said the economy is showing signs of reacceleration. “I expect to see further U.S. dollar strength,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. “Moskow will toe the Fed line, saying he still sees upside risks to inflation.'' The dollar rose to $1.2959 per euro at 11:22 a.m. in Tokyo from $1.3001 yesterday, the strongest since Nov. 24. The U.S. currency traded at 119.38 yen compared with 119.37 yen late in New York yesterday, when it reached 119.54. It will rise to $1.2900 per euro and 120 yen within a week, Grace forecast. Moskow is scheduled to speak on the U.S. economy at a luncheon in Iowa at 11:30 a.m. local time. Losses in the euro accelerated after it dropped below $1.2980 against the dollar where traders had orders to sell the currency, said Koichi Kano, a foreign-exchange trader in Tokyo at Citigroup Inc. Traders sometimes place automatic orders to limit losses in case their bets go the wrong way. The euro may fall to $1.2950 today, Kano said. The dollar appreciated against the yen and euro since a Jan. 5 U.S. government report showed employers added 167,000 workers in December, exceeding the median forecast of 100,000 in a Bloomberg News survey.

ECB Rate Decision

The Fed has kept its target overnight lending rate between banks at 5.25 percent since June, halting a two-year run of increases. The BOJ's key rate is 0.25 percent after a quarter-percentage-point increase in July, the first in almost six years. The European Central Bank's benchmark is 3.5 percent. Interest-rate futures show traders see a 6 percent chance the Fed will lower rates in March, down from 100 percent last month. The Fed next sets rates on Jan. 31. Losses in the euro may be limited on speculation ECB President Jean-Claude Trichet will signal policy makers intend to keep raising rates after holding them unchanged at a meeting tomorrow. “Trichet won't be able to make any dovish comments,'' said Nobuaki Tani, a senior currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by assets. “He will remain alert to inflation risks. The euro will be bought.'' The euro may rise to $1.3150 against the dollar and 156 yen this week, Tani said.

Strength in Europe

Economic reports this week in Germany, Europe's largest economy, supported the case for higher rates. Industrial production gained the most in seven months in November and manufacturing orders climbed for the first time in three. Futures trading shows investors expect the Frankfurt-based ECB to increase its main lending rate to 3.75 percent as soon as March. The yield on the three-month Euribor futures contract for that month was 3.93 percent yesterday, up from 3.75 percent on Dec. 4. The December contract yielded 4.12 percent. The dollar gained yesterday as crude oil touched the lowest since 2005, spurring optimism about U.S. economic growth. Crude oil for February delivery fell 0.8 percent to $55.64 a barrel on the New York Mercantile Exchange, the lowest close since June 15, 2005. Prices are down 12 percent from a year ago. “There's a reasonable correlation between the dollar and the crude oil price,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. “A fall in crude oil prices reduces the U.S. trade deficit and also increases the disposable income of U.S. consumers.'' The currency will trade between $1.2980 and $1.3060 per euro today, he said.

U.S. Trade Deficit

A government report today will probably show the U.S. trade deficit widened to $60 billion in November from $58.9 billion the previous month, according to the median estimate of 63 economists surveyed by Bloomberg. The yen may fall as the drop in oil prices will also reduce pressure on inflation in Japan, reducing the need for the Bank of Japan to raise interest rates at a Jan. 18 meeting. “A BOJ rate increase is unlikely in January, given the recent drop in oil prices,'' said Ryohei Muramatsu, a manager of Group Treasury Asia at Commerzbank in Tokyo. “The yen may fall'' to 119.70 per dollar and 155.30 a euro today, he said. Investors see a 58 percent chance the BOJ will raise rates next week, down from 74 percent yesterday, according to Credit Suisse Group data based on contracts for the exchange of interest payments.


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