Dollar Climbs, But Real Money on Sideline

Tue Aug 24, 2004
By Jamie McGeever

NEW YORK (Reuters) - The dollar was mostly stronger across the board on Tuesday as dealers pared back bets against the currency in predominantly technical trading.

The gains, particularly against sterling, which slumped to a new three-month low, follow relatively hawkish remarks from Federal Reserve officials on Monday suggesting U.S. interest rates will be raised again next month.

Upbeat comments on the U.S. economy from Dallas Fed President Robert McTeer and Fed Governor Ben Bernanke bolstered the greenback across the board.

Sentiment toward the United States, the world's largest economy and its biggest oil consumer, also got a boost from further declines in oil prices from last week's record high.

Although the prospect of rising U.S. rates is generally deemed positive for the dollar, the currency's gains this week do not signify an underlying market shift, analysts said, and technical factors and positioning remain the driving forces.

"I think the story today, just like yesterday, is position squaring," said Rebecca Patterson, global currency strategist at JP Morgan in New York. And ahead of the Republican National Convention in New York and next week's release of the U.S. employment report for August, "the bias of risk is that people square up a little more," Patterson said.

Dealers, who are still thought to be short of dollars, are adopting a more neutral stance ahead of U.S. durable goods data on Wednesday and a keenly awaited speech from Federal Reserve Chairman Alan Greenspan on Friday.

"This is not fundamental buying," said a senior dealer at a large U.S. bank in New York. "This is definitely position squaring ... and the pain is in the high yielders."

Currencies like sterling and the Australian dollar, whose economies offer much higher interest rates than assets denominated in dollars and most other currencies, are under the most pressure because rising U.S. rates would narrow rate differentials in favor of the dollar.

The dollar reacted little to news that U.S. existing home sales for July dipped to a seasonally adjusted annual rate of 6.72 million units, weaker than market expectations for a decline to 6.81 million.

Around noon in New York Tuesday, the pound (GBP=: Quote, Profile, Research) was 0.8 percent weaker at $1.7929. It had traded at $1.7922, according to Reuters data, its lowest since late May.

But by around 12:24 p.m. (1624 GMT), the Australian dollar (AUD=: Quote, Profile, Research) fell 1 percent to session lows around $0.7046.
The euro (EUR=: Quote, Profile, Research) was down 0.3 percent at $1.2097, its session low.

The dollar also was higher against the Swiss franc (CHF=: Quote, Profile, Research) at 1.2716 francs.

But the U.S. currency was weaker against the yen, at 109.57 yen (JPY=: Quote, Profile, Research) , dragged down by the euro's 0.5 percent slide to 132.60 yen (EURJPY=: Quote, Profile, Research) .

The euro is expected to attract good bids below $1.2100, dealers said, although sterling looks more vulnerable to further downside, when $1.7800 could come into view.

The pound has been under heavy selling pressure since the minutes of the Bank of England Monetary Policy Committee's last meeting suggested its rate-raising cycle was drawing to an end.

This contrasts with the Fed, which raised rates this month for the second time in six weeks and said the economy was poised for a period of faster growth.

McTeer and Bernanke reiterated this view on Monday, saying the recovery is self-sustaining and able to withstand high oil prices. McTeer also said the Fed hasn't tightened monetary policy in a strict sense, rather it has reduced the extent of loose accommodation.

"They were a little bit hawkish," said Greg Anderson, senior currency strategist at ABN AMRO in Chicago. "They made it clear that Fed rates as they stand are accommodative. They will go up."

The dollar also benefited from a more positive backdrop on Tuesday. U.S. stocks gained in morning trading, although by midday, the Dow Jones industrial average was up slightly, while the Nasdaq and the Standard & Poor's 500 had edged lower.

U.S. Treasury bond yields were higher, while gold and oil prices declined.

After running up to a record just under $50 a barrel last week, U.S.-traded crude oil futures (CLc1: Quote, Profile, Research) for October delivery were down 63 cents at $45.42 at midday.

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