Dollar leaps to 6-week highs in technical rally

NEW YORK, Sept 8 (Reuters) - The dollar rose to six-week highs on Friday as dealers aimed at technical targets and positioned for the risk that the Federal Reserve may have to raise interest rates again to keep inflation at bay.
The dollar was set for its biggest weekly gain in two months against a basket of six major currencies. Traders said the dollar's gains were mostly technically driven. The breach of key levels in the euro and sterling sparked a paring of bloated long positions, or bets that both currencies would rise. That added momentum to the dollar's gains. Solid U.S. economic data and warnings on inflation from Federal Reserve officials this week have also lent the dollar some support. Although analysts expect the Federal Reserve to keep interest rates on hold this month, dollar bulls have not given up hope for more rate rises in coming months. "It's mainly been technically driven, with the euro taking out some key support levels at $1.2750 and below $1.27 today," said Nick Bennenbroek, currency strategist at Brown Brothers Harriman in New York. "And on the margin we've had some data come in on the firm side this week, supporting the dollar." The euro was last down 0.5 percent on the day and down 1.3 percent on the week at $1.2665, after triggering large stop-loss orders below $1.2690 and touching a six-week low of $1.2651. Sterling slipped 0.6 percent to $1.8650, after earlier plumbing six-week lows of $1.8628. Against the Swiss franc, the dollar was up 0.4 percent at 1.2472 francs. The dollar index is up 1.25 percent on the week.The dollar stood at 116.90 yen, up 0.4 percent on the day. One of the biggest losers this week has been the New Zealand dollar, which has slumped almost 3 percent and extended losses on Friday after the country's finance minister voiced concern over the currency's recent rise. The kiwi dollar was down 1.3 percent at $0.6370.
G7 AWAITED
Speakers from the Fed this week have continued to sound warnings on higher inflation even though economic growth is slowing, keeping the risk alive the Fed could be forced to tighten policy later this year and thereby support the dollar. "At the margins, some of the recent comments from Fed officials paint a different picture from what is priced into the market," said Sophia Drossos, currency strategist with Morgan Stanley. "Some of the doves on the FOMC are starting to sound circumspect about upside inflation risks," she said, referring to the policy-setting Federal Open Market Committee. The spotlight next week is expected to shift to a meeting of the Group of Seven industrial nations. Investors will be looking to see if finance ministers keep up pressure on countries enjoying big trade surpluses, notably China, to allow more currency appreciation. The dollar fell sharply after the last G7 meeting in April, when the group of rich nations urged more currency flexibility to help ease global imbalances -- a call that was interpreted as giving a green light to a weaker dollar. But it was a fleeting move. The dollar has since pared about half its losses against a group of major currencies. Against the yen, the dollar has rebounded completely.

G-7 Says Economy ' Strong,' Urges Asian Currency Gains

April 22 (Bloomberg) -- The Group of Seven said the world economy is in "strong" shape and called on some Asian nations, especially China, to allow their currencies to appreciate.Finance ministers and central bankers from the group said prospects for continued economic expansion are favorable, even as oil prices climb to a record. Stronger Asian currencies and less reliance on exports for growth can help reduce imbalances that jeopardize that encouraging outlook, the officials said. "The global economy is in the best shape it's been in a long, long time with strong growth, high productivity, inflation well-contained," U.S. Treasury Secretary John Snow said at a press conference after the G-7 meeting in Washington yesterday.

The world economy is on its surest footing since the start of the decade as growth in Japan and the euro region picks up, while the U.S. probably enjoyed the fastest quarterly expansion in more than two years. In a separate statement, the G-7 said it's "critical" China let the yuan advance and some oil producing nations allow more fluctuation in their currencies. "In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, easing reliance on export- led growth strategies, and actions to strengthen financial sectors," the statement said.

New Language

The language is a departure from the words the G-7 usually uses to address China's exchange rate. Past communiqués have referred only to the need for more flexibility without saying whether the yuan should strengthen or weaken.Officials bolstered the language because they felt China's efforts to increase the flexibility of its currency have been too slow, a Japanese finance ministry official told reporters in Washington late yesterday on the condition of anonymity."They have clearly started to apply more pressure," Lara Rhame, a currency strategist at Credit Suisse in New York, said in an interview. "They have singled out China and the rest of the emerging market economies." Asian currencies will probably rally when markets open on April 24, Rhame said. French Finance Minister Thierry Breton said Japan may let the yen advance as its economy rebounds and deflation ends. "It's a positive story for Asian currencies, especially with these kind of statements," said Irene Cheung, an economist and strategist at ABN Amro Holding NV in Singapore. "If we see the yuan and the Korean won head higher on Monday then that will set the mood and most other Asian currencies will move higher too."

"Not the Message"

The G-7 remarks on exchange rates aren't an invitation to sell the dollar against currencies outside Asia, said European Central Bank President Jean Claude Trichet. "This is certainly not the message," Trichet told reporters after attending the meeting. "It would be a mistake" to interpret it as a de-facto call for a stronger euro, he said. The euro has climbed 4.2 percent versus the dollar this year.The G-7 gathering followed a meeting between President George W. Bush and Chinese President Hu Jintao at the White House that did little to narrow differences over China's managed exchange-rate system. The yuan has gained 1.2 percent since a revaluation in July.The U.S. trade deficit with China widened to a record $202 billion last year, a quarter of the current account shortfall, which reached an unprecedented $805 billion. The current account is a measure of trade, services, tourism and investments. Snow is under pressure from the U.S. Congress to brand China a currency manipulator for keeping the yuan artificially low to boost exports.

Oil Prices

The International Monetary Fund this week raised its forecast for global economic growth in 2006 to 4.9 percent from a September prediction of 4.3 percent. At the same time, the G-7 said it's worried about rising oil prices, protectionism and imbalances reflected by the U.S. current account deficit and China's surplus. The G-7 represents almost two-thirds of the world economy, comprising the U.S., Japan, Germany, the U.K., France, Italy and Canada. Snow, European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Sadakazu Tanigaki are among officials who signed off on the statement.With oil jumping to an all-time high of $75.35 a barrel on the New York Mercantile Exchange yesterday, energy prices remain "a risk" to the economic outlook, the G-7 statement said. Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, calculates each $10 increase in the price of oil knocks 0.5 percentage point off growth in the G-7. To correct imbalances, the U.S. must reduce its budget deficit, Japan and Europe must boost domestic demand and Asian nations must loosen the tethers on their currencies, the G-7 statement said, repeating language from previous meetings. At least part of that prescription is starting to come true. Japan's economy will expand 2.8 percent in 2006, the most since 2000, and the euro area's gross domestic product will increase 2 percent this year, according to this week's IMF growth forecasts.The separate statement on imbalances also called on oil- producing countries to accelerate investment in production capacity and to diversify their economies, and for other "current-account surplus countries" to boost domestic consumption and investment.Following their formal meeting, the G-7 held a working dinner with China, Saudi Arabia, Russia and the United Arab Emirates. China is the world's second-largest consumer of oil after the U.S., and Saudi Arabia, Russia and the UAE are the world's biggest, second-largest and sixth-largest oil exporters.

Treasury benchmark may see 5.50 percent

NEW YORK (Reuters) - The brisk sell-off in bonds may take the yield on benchmark U.S. Treasury notes to as high as 5.5 percent this quarter, strategists said, particularly now that a key psychological level has been breached. The 10-year yield moved decisively above 5 percent on Thursday to its highest level in nearly four years and will probably continue to rise on the prospects for economic growth, interest-rate hikes and elevated commodities prices. Futures markets show the Federal Reserve and other global central banks will continue to raise rates, and commodities prices could feed into core inflation later in the year -- helping drive up sovereign-debt yields globally, bond strategists said.
Against that backdrop, investors may demand higher rates on U.S. bonds in order to compete with returns they hope for from stock and commodities funds, some said. Equities strategists polled by Reuters see U.S. benchmark stock indexes gaining almost 10 percent this year. The Standard & Poor's 500 Index gained 3.7 percent in the first quarter. "People are looking for extra return out there," said Bill Kohli, managing director for global specialist core fixed income with Putnam Investments in Boston, adding that the 10-year Treasury note's rise to around 5.05 percent reflects that. "People will be re-evaluating what an appropriate real rate is, given the equity (market) returns we have had in the first quarter and that commodity prices are up," Kohli said. If the 10-year note's yield, which moves inversely to price, were to rise to between 5.25 percent and 5.5 percent by the end of June, Kohli said "that wouldn't surprise me." As investors continue to shift into competing asset classes that may offer higher returns -- including speculative-grade or "junk" U.S. corporate bonds, stocks and commodities -- outflows from U.S. government debt may weigh on Treasuries prices and send yields higher.
"The 10-year above 5 percent means that the economy has been strong and people are betting it will continue to be" for the rest of 2006, said Brian Reynolds, chief market strategist at M.S. Howells, an institutional brokerage firm in Scottsdale, Arizona. "What we have seen this year is people selling Treasuries to buy corporate bonds, because the economy has been great and (companies') profits have been OK and are expected to be for a long time -- and you buy corporate bonds for the additional spreads," Reynolds said. The Federal Reserve may react to the first signs of the filtering of high commodities prices into core inflation gauges by raising interest rates more than the market currently expects, lifting bond yields, warns Jack Malvey, chief global fixed-income strategist with Lehman Brothers in New York. "The bond markets may be in for more central bank medication," Malvey said, adding that it looks increasingly likely the federal funds target rate could rise to 5.5 percent from the current 4.75 percent, and perhaps higher. Over the next three or four months, the 10-year note's yield could rise to between 5.35 percent and 5.50 percent,he said. "The big picture is that the world economy is in vigorous form, commodity prices will pass through to inflation over the balance of this year, and central banks will be on the hawkish side," Malvey said . There is no guarantee, of course, that a breach of 5 percent means a move to 5.5 percent. The 10-year yield's most recent surge above 5 percent came in March 2002. The yield topped out at 5.47 percent that month before slipping back to as low as 4.19 percent in November of that year. And there are some who expect the world's biggest economy to slow sooner rather than later and therefore don't see the benchmark note's yield moving much higher. "On a longer-term basis, I don't see a fundamental reason for it to go above 5 percent," said Keith Hembre, chief economist with FAF Advisors in Minneapolis. "There is the view that global growth would drive longer yields higher, but decelerating domestic activity in the second quarter and third quarter, and the cumulative effect from the Fed hikes," in slowing economic activity, should keep the 10-year yield below 5 percent later this year, Hembre said.

Dollar's Rally Stalls; Traders Seek Signs of Economic Strength

March 22 (Bloomberg) -- The dollar's two-day rally against the yen and euro stalled as traders said they need more evidence the Federal Reserve will raise interest rates twice more before pushing the U.S. currency higher. The dollar gained to start the week, following its biggest weekly loss in two months, as investors rebuilt expectations U.S. rates will rise more than in Europe and Japan. Traders must wait for tomorrow's reports on jobless claims and home sales for more evidence the U.S. economy is accelerating. "The dollar's upside momentum has slowed,'' said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York. The dollar fell to 116.74 yen at 8:36 a.m. in New York from 117.27 yesterday. It traded at $1.2090 per euro from $1.2095 late yesterday. The U.S. currency will rally to at least $1.15 by the third quarter, Brown Brothers forecasts. The U.S. currency initially declined today after Fed Chairman Ben S. Bernanke said in a letter yesterday to Representative Brad Sherman "the possibility of a future disruptive correction of the U.S. trade deficit cannot be ruled out.'' A widening U.S. trade deficit sent the dollar lower against the euro and yen from 2002 to 2004. Traders expect the Fed to raise rates at least twice more this year after 14 straight increases since mid-2004 to 4.5 percent. U.S. jobless claims probably remained above 300,000 for a third straight week, while sales of existing homes likely slowed about 0.9 percent to a 6.5 million annual rate, according to the median forecasts in surveys by Bloomberg News.

Bank of Japan Governor Toshihiko Fukui said today the bank hasn't decided when to lift rates from zero percent, where they've stood since 2001. The European Central Bank on March 2 raised its benchmark for the second time in three months to 2.5 percent. "The Fed continues to underpin the view that more rate hikes are highly probable, and yield premiums favor the dollar in the short term,'' said Jeremy Stretch, a currency strategist at Rabobank Groep in London. Fukui told a parliamentary committee in Tokyo that the central bank has no "predetermined time frame'' for lifting rates. Japan's central bank on March 9 voted to reduce the amount of money it makes available to lenders, ending a policy of flooding the world's second-largest economy with money to combat deflation.

The euro earlier fell against the dollar and the yen after a report showed industrial orders in the 12 nations sharing the common currency fell more than expected in January. Orders dropped 5.9 percent from the previous month, the biggest decline since May 1997, a European Union report showed. Economists surveyed by Bloomberg had expected a 0.2 percent decline. The prospect of higher rates has sent the euro up 1.9 percent versus the dollar this year. "It was a bad number and traders don't have anything else important to trade off today,'' said Armin Mekelburg, a currency strategist at HVB Group in Munich. "There has been some exaggerated optimism on how high ECB rates would go.'' The dollar has rebounded from its biggest weekly loss in two months as traders renewed bets on how high the Fed is likely to push rates. Interest-rate futures show traders have fully priced in a rate increase to 4.75 percent at the Fed's meeting March 28. The chance of another increase to 5 percent in May rose to about 90 percent from 73 percent March 17.

"We're back to 5 percent expectations and the dollar is recovering from its sharp slide of last week,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. "The dollar has a little further to go.'' The U.S. currency yesterday had the biggest gain in two weeks versus the euro and the yen after a key gauge of inflation rose more than expected. Prices paid to factories and other producers last month, excluding energy and food, rose 0.3 percent, compared with the 0.1 percent forecast in a Bloomberg economist survey. Gains for the dollar versus the euro may be limited after ECB policy maker Axel Weber said today he's concerned about inflation in the euro-region. The Frankfurt-based central bank's March 2 forecast for inflation to hold above 2 percent this year and next is "a certain cause for concern,'' he said in an interview in Frankfurt yesterday. Investors expect the ECB to raise its rate to as high as 3.25 percent by the year-end, futures trading shows.

Chinese banks to trade FX on Reuters exchange

Financial Times London 2/20...China’s four largest banks yesterday signed up to trade foreign exchange via Reuters’ electronic trading system. The move gives Bank of China, Bank of Communications, China Construction Bank and the Industrial and Commercial Bank of China access to about 40 spot currency pairs traded the system. Some of the banks had already signed up with EBS, Reuters’ main rival in the inter-dealer market. Until recently, onshore Chinese banks could only trade non-renminbi currency pairs via the China Foreign Exchange Trade System, a dealer-to-bank platform that boasts just ten market-makers and far less liquidity than Reuters’ global system. The move coincides with increased sabre-rattling on Capitol Hill about China’s foreign exchange regime, with John Snow, the US Treasury secretary, hinting earlier this month that his department was likely to formally accuse China of being a “currency manipulator” in its next report on trade and exchange rates. China has allowed the renminbi to appreciate by just 0.8 per cent since a 2.1 per cent revaluation of the currency in July 2005. As such, the recent moves by Chinese banks to enter the wider FX markets will be seen by some as another small sign that China is slowly liberalising its foreign exchange regime and preparing its domestic banks for a less regulated trading environment. “This is another indication the market is opening up,” said one currency analyst. “China can say ‘stop moaning, we are developing our system at our own pace’.” However, simultaneously, there are signs that Chinese banks and exporters are still woefully unprepared for the advent of a freer-floating currency that would move by more than a fraction of a percentage point a day. Yesterday only five deals were completed on China’s onshore forwards market, according to Tony Norfield, global head of FX strategy at ABN Amro, and even that is more activity than is seen on many days. “Five is a relatively high number – on some days there are only one or two deals done. That is fairly depressing,” said Mr Norfield. In theory there should be literally thousands of Chinese exporters keen to hedge their forward foreign currency exposure, particularly with the offshore non-deliverable forwards market pricing-in a 12-month renminbi rate of Rmb7.6955, an effective appreciation of 4.4 per cent from yesterday’s closing price of Rmb8.0475.

Companies Keep Hiring as Demand Grows: U.S. Economy Preview

Jan. 1 (Bloomberg) -- U.S. employers added another 200,000 jobs last month as companies remained optimistic that the new year will bring more corporate investment and solid economic growth, according to a survey of economists before a government report this week. The estimate of new jobs created in December, the median forecast in a Bloomberg News survey of economists, follows an increase of 215,000 jobs in November. The Jan. 6 report from the Labor Department will probably also show the unemployment rate held at 5 percent, in line with the average over the last decade, according to the survey. Business investment in new equipment and operations will probably play a larger role in driving economic growth next year and compensate for any weakening in consumer spending, economists said. A gauge of manufacturing probably remained at a level showing strength in production and orders. "Corporations in America have made huge profits, but I think they've been hesitant to spend those profits'' so far, Timothy Kane, a research fellow at the Heritage Foundation in Washington, said in an interview. "Most of us think that the time has come that we will probably see a lot of expansion this year, a lot of hiring.'' Employers probably added 2 million jobs last year. The U.S. created 2.194 million jobs in 2004, the most since 1999, according to Labor Department statistics. The Institute for Supply Management is forecast to report on Jan. 3 a reading of 57.4 in its December index of manufacturing. That compares with 58.1 in November and is higher than the 55.7 average for all of 2005.

Growth Impulses
"The perspectives for the coming year can be described as solid,'' Thomas Amend, an economist at HSBC Trinkaus & Burkhardt KGAA in Dusseldorf, Germany, said in an interview last week. "Apart from consumption, which is one of the most important growth drivers in the U.S., we are also getting increasingly positive growth impulses from the investment side.'' Some factories are running out of spare capacity in their bid to meet demand, something Federal Reserve policy makers have indicated could push up inflation. On Jan. 3, investors may also get a sense of how much more Fed policy makers will raise their benchmark interest rate after 13 increases in a row. The Fed will release minutes of its Dec. 13 policy meeting at which they decided to stop saying there was "accommodation'' in interest rate policy. Central bankers also said "possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.''

Capacity Use
The amount of capacity in use at the nation's factories was 79.4 percent in November, matching October as the highest since September 2000. Bottlenecks typically develop and threaten to boost inflation when capacity utilization is around 81 percent, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York. With higher interest rates and a slowdown in the housing market making it less likely consumer spending will accelerate this year, the strength of the economy will depend more on how much companies upgrade equipment and plants. Less home price appreciation will limit refinancing, which has been a source of cash for consumer spending, economists said. "Chances are good that housing activity and prices will level out in the period ahead,'' economists at Citigroup said in a note to clients. "The chief by-product of such a development would be consumer spending growth more in line with, or somewhat below, disposable income growth.'' So far, consumer spending has remained robust. The week ended Dec. 24 was the best so far of the holiday shopping season with comparable sales rising 2.8 percent from the previous week, according to the International Council of Shopping Centers. The group reaffirmed its forecast of a gain of 3 percent to 3.5 percent for the season.

Retail Sales
The ICSC is forecasting the second-biggest sales gain for retailers since 1999. Sales rose 5.4 percent in 1999 and 4 percent in 2003. Including Internet purchases, spending has been even stronger. Sales from Oct. 29 to Dec. 23 rose to $30.1 billion, according to a survey conducted by research firm Nielsen/NetRatings, Goldman Sachs & Co. and Harris Interactive. Computer hardware and related equipment led the increase, rising 126 percent to $4.82 billion, followed by consumer electronics, up 109 percent to $4.79 billion. Shoppers were drawn by free shipping offers from retailers including Amazon.com Inc. and L.L. Bean Inc. Amazon.com, the world's biggest online retailer, said Dec. 26 holiday sales worldwide set a record this year, spurred by demand for iPod music players, video games and jewelry.
The Institute for Supply Management is forecast to report on Jan. 5 that its index of non-manufacturing business, which includes retailers, construction firms and other service providers, rose to 59 in December from 58.5. Readings higher than 50 indicate expansion. "We see very strong demand now,'' Stephen Bollenbach, chief executive officer of Hilton Hotels Corp., said in an interview last week from Beverly Hills, California. "It's really good times for our business. From a hotel perspective it's boom times.''

Dollar Rises Against Euro and Yen; Job Losses Are a Quarter of Forecasts

Oct. 7 (Bloomberg) -- The dollar rose for the first day in three after the U.S. economy's job losses last month were less than a quarter of the number forecast by economists. Today's gain reduced the dollar's loss against the euro for the week, its first weekly decline in five. Interest rate futures indicate traders expect the Federal Reserve will raise its benchmark three more times to 4.5 percent by January. "It's dollar positive because you still have a much more resilient U.S. economy than had been expected,'' said David Durrant, investment strategist at Bank Julius Baer & Co. in New York, which manages about $30 billion. "The Fed's path hasn't changed -- this number tells us that after the next rate hike we should be looking for more.'' Against the euro, the dollar traded at $1.2129 at 5 p.m. in New York, from $1.2178 late yesterday, according to electronic currency-trading system EBS. The dollar rose to 113.82 yen from 113.30. For the week the dollar dropped 0.9 percent against the euro and rose 0.3 percent against the yen. The Labor Department said employers cut 35,000 workers from their payrolls in September, and August's job gains were revised up to 211,000. Economists expected a loss of 150,000 jobs last month, based on the median of 73 estimates in a Bloomberg News survey.

August Impact
The dollar's gains were driven more by the revision to August, and the September data may present an incomplete picture of the storms' impact, said Russell LaScala, a currency trader in New York at Deutsche Bank AG. "The only thing I was trading off of was the revisions,'' LaScala said. "It's difficult to put a lot of capital behind this data'' from September, he said. The rally may also be limited by lighter-than-usual trading before the holiday weekend. The Bond Market Association recommended bond markets close early today, at 2 p.m. New York time, and remain shut Oct. 10 in observance of the Columbus Day holiday. Stock markets will maintain normal hours. The U.S. currency rose 12 percent against the euro and 11 percent versus the yen this year as the Fed has raised its benchmark rate six times, to 3.75 percent. The European Central Bank has kept its rate at 2 percent for two years, while the Bank of Japan has maintained rates near zero since 2001. The yield on the December federal funds futures at the Chicago Board of Trade held at 4.12 percent, indicating traders see a 78 percent chance the Fed will lift its rate to 4.25 percent by year-end after boosting the rate to 4 percent Nov. 1.

ECB Bolsters Euro
The 12-nation European currency this week has been bolstered by a more aggressive stand by the ECB on rates and inflation, rising yesterday by the most since January 2004 versus the dollar after ECB President Jean-Claude Trichet said the bank may increase interest rates "at any time'' to prevent inflation from accelerating. "A lot of people will be picking up euros at these levels,'' said Mitul Kotecha, head of currency strategy in London at Calyon, the securities unit of Credit Agricole SA. "After the hawkish comments from Trichet, people may think this is the bottom of a range'' for the euro, and "it's a good level to get in.'' The Fed last month said the U.S. economy faces only a "near-term'' setback from Hurricane Katrina, the nation's most costly natural disaster, and pledged to stick to its policy of raising rates at a "measured'' pace.

'Supportive of Dollar'
"Expectations of further rate hikes in the U.S. over the rest of the year are very supportive of the U.S. dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. "The market has already moved to price in the first 25 basis points rate hike in November, but has not yet fully priced in the second in December.'' The dollar may rise to $1.19 per euro in the coming three months, he said. The dollar has risen or fallen an average of 1.1 cents per euro on the day of the monthly jobs report in the past 12 months, according to data compiled by Bloomberg. St. Louis Fed Bank President William Poole on Oct. 4 described as "reasonable'' futures-market predictions that rates will rise another half-percentage point this year. UBS AG, the world's second-biggest currency trader, yesterday raised its forecast for the dollar versus the euro and the yen as it expects the Fed to continue to express concern about inflation. The bank expects the dollar to trade at $1.22 against the euro in one month and $1.24 in three months. UBS forecast it will trade at 112 yen in one month and 108 yen in three months.