Dollar gains as oil prices ease

NEW YORK, Aug 26 (Reuters) - The dollar firmed on Friday, supported by softer oil prices, after posting losses earlier in the session in thin summer trading, analysts said. U.S. oil futures fell more than $1 to $66.22 per barrel, as worries eased that Hurricane Katrina was not expected to significantly affect offshore crude production in the Gulf of Mexico. High oil prices have hurt the dollar in the past, given that the United States is the world's largest crude importer. Late in New York trade, the euro was down 0.1 percent at $1.2283, failing to hold intra-day highs around $1.2342, according to Reuters data. "Looks like receding oil prices are helping the dollar and also earlier in the trading session, the dollar successfully held above its intra-day low against the euro," said Alex Beuzelin, senior market analyst at Ruesch International in Washington DC. "That has set the stage for the dollar's short-term rebound. But I don't see this as anything more than continued range trading," he added. Against the Japanese yen, the dollar rose slightly to 110.15 yen, and rallied 0.1 percent against the Swiss franc to 1.2590 francs. Sterling also slipped 0.1 percent against the dollar to $1.8005. An unexpected fall in U.S. consumer sentiment for August and remarks from Federal Reserve Chairman Alan Greenspan on Friday did not have a strong impact on the dollar, traders said. Still, amid thin and listless trading conditions, Greenspan's remarks had been enough to keep the dollar on the defensive earlier. Greenspan said the Fed will pay increasing attention to asset price shifts since global economic activity was being influenced by capital gains on various types of assets and on the debt that sustains them. In prepared remarks for a speech in Jackson Hole, Wyoming, Greenspan indicated that the housing market is an increasingly important factor in Fed policy decisions. "Our forecasts and our policy are becoming increasingly driven by asset price changes," the Fed chief said.

This may be a reference to house prices, which many analysts say are reaching bubble proportions and suggest the Fed will continue raising rates. But balanced against concerns over what recent U.S. data and record oil prices say about the economy going forward, the dollar is not getting much support. "Greenspan appears to argue that whether the U.S. housing bubble ends with a hard or a soft landing depends near term upon the Fed's success in applying Greenspan's new risk management approach -- the Greenspan Put," said Michael Woolfolk, senior currency strategist at Bank of New York. "The higher interest rates go now, the more room the Fed will have cut rates when housing prices correct," he added. Indeed, dealers may be looking ahead as to when the Fed might end its tightening cycle. Currency analysts at UBS reckon the market is waiting "to see when the Fed will start signaling if it is close to the end of its cycle or not." But despite the dollar's weak tone on Friday, it is still within recent trading ranges, albeit at the lower end. John McCarthy, head of trading at ING in New York, sees the euro struggling to break above $1.2350, while dollar/yen will trade within 50 pips on either side of 109.50 yen. "The yen is the one thing that might get things going a bit," he said.

U.S. Treasuries Benefiting From a Rising Dollar, Increased Foreign Demand

Aug. 22 (Bloomberg) -- U.S. Treasuries are benefiting a rising dollar and yields that are higher than on comparable German, Canadian and Japanese government bonds. The Federal Reserve's holdings of Treasuries for foreign central banks and international accounts rose $7.2 billion to $1.10 trillion in the week ended Aug. 17, the biggest increase since February. A Japanese government report last week showed the country's investors doubled their purchases of overseas bonds. Treasury notes maturing in 10 years rose the past two weeks on speculation international investors, owners of about half the U.S. government's $4 trillion in debt, will keep buying. The notes haven't climbed for three weeks since October. The dollar last week had its biggest gain against the euro in more than two months, enhancing returns for international investors who own U.S. debt. "We're got a reasonably positive view of bonds at the moment,'' said Julian Foxall, who helps manage about $10.5 billion of bonds at Pimco Global Advisors Ltd. in Sydney. "The Fed has been raising rates for some time now and the 10-year yield just hasn't moved over the whole period. We think that scenario will continue.'' Yields on benchmark 10-year Treasuries have declined to 4.21 percent, the lowest since July, from 4.39 percent on Aug. 5. Yields move inversely to bond prices. The 4 1/4 percent note due in August 2015, ended last week at 100 3/8, up about 1/4, or $2.50 per $1,000 face amount. Against the euro, the dollar gained 2.4 percent to $1.2154 last week. It has risen 12 percent from a record low of $1.3666 on Dec. 30.

High Yield Market

The two-week rally narrowed the gap between 10-year U.S. and German government bond yields to 1 percentage point, down 5 basis points from a five-year high reached on Aug. 8. Yields on 10-year Treasuries exceed those on bonds sold by every other Group of Seven country except the U.K. A year ago, they were higher than just half the G7. British 10-year gilts yield 6 basis points more than Treasuries, down from 74 basis points a year ago. A basis point is 0.01 percentage point. The U.S. has become the "the high yield market'' of choice for investors, said Richard Gilhooly, government bond strategist in New York at BNP Paribas SA, France's second-biggest bank. The firm is one of the 22 primary dealers of U.S. government securities that are required to bid at Treasury auctions. Surveys show a rising enthusiasm for U.S. debt. Ried, Thunberg & Co.'s index on the outlook for the 10-year note is at 49, the highest since March 2004, and up from a low this year of 38. The 36 international investors surveyed by the Jersey City, New Jersey-based bond-research firm manage $1.3 trillion. A reading below 50 indicates participants expect the note's yield to rise by the end of September.

Fed Expectations

Buying Treasuries and selling European government bonds may be "one of the top trades for 2006,'' as the Fed increases in overnight lending rates damp economic growth just as Europe's expansion accelerates, debt strategists at Merrill Lynch & Co. said last week. "Our worry is that the Fed overdoes it,'' said Kenneth Taubes, who oversees $16 billion in bonds at Pioneer Investment Management in Boston. "They are certainly showing no signs of being finished here.'' The Fed on Aug. 9 raised its benchmark rate by a quarter point to 3.5 percent, the 10th increase since June 2004. A Bloomberg survey of the primary dealers earlier this month found that 20 expected the central bank to increase the so-called federal funds rate to at least 4 percent by year-end. Fed policy makers, even amid concern that record high energy prices will slow the economy, repeated a plan to push rates higher at a "measured'' pace. Ried Thunberg reported 72 percent of its survey respondents said near-record energy prices are beginning to impede economic activity.

Oil and Inflation

Crude oil for September delivery reached an all-time high of $67.10 on Aug 12. Wal-Mart Stores Inc., the world's largest retailer, last week said its second-quarter profit rose by the smallest amount in four years, slowed by record gasoline prices. The Fed reiterated that inflation expectations were "well contained,'' a surprise to some investors who expected the central bank to be more concerned after a six-week slide in Treasuries sparked by increases in employment, manufacturing and consumer spending. The 10-year Treasury yield was 4.44 percent before the central bank's Aug. 9 statement, "It's a very dovish, soft-handed approach when people were expecting a slap on the behind,'' said David Petrosinelli, who manages $5 billion of bonds at Shay Assets Management Inc. in Chicago.
Consumer prices, excluding food and energy, rose 0.1 percent in July, the same as in June, the government said last week. A 0.2 percent increase was the median forecast in a Bloomberg survey of 63 economists. U.S. debt prices also rose last week after Japan's Ministry of Finance said on Aug. 18 the nation's investors bought a net 154 billion yen ($1.39 billion) of foreign bonds in the week ended Aug. 13, the most since the week ended July 23. "It could be the increase of the U.S. interest rate in the longer-term'' that makes Treasury yields attractive, said Takahira Ogawa, director of sovereign ratings at Standard & Poor's International in Singapore. Ten-year Treasuries yield 2.79 percentage points more than the Japan's 10-year bonds, up from the past year's low of 2.5 percentage points reached on Oct. 22.

Rising dollar has best week vs euro since June

NEW YORK, Aug 19 (Reuters) The dollar edged up against a basket of major currencies for the fifth straight session on Friday, tacking on its biggest weekly gain against the euro since early June. A series of U.S. economic reports this week a strong reading of the Philadelphia Federal Reserve Bank's index of business activity and data showing strong capital inflows to U.S. assets have bolstered the case for continued dollar supportive interest rate hikes by the Federal Reserve. Investors "are putting money into dollars," said JoeFrancomano, vice president of foreign exchange at Erste Bank. "It's a safe trade given the rate outlook." The dollar index <.DXY> rose to its highest since Aug. 3 at88.90 before paring gains, to 88.58 by late afternoon. The euro was down 0.1 percent from Thursday at 1.2165, after falling as low as 1.2127 its lowest since Aug. 1. The euro is down 2.4 percent this week, its biggest weekly decline since the week ended June 5. However, the euro is almost right in the middle of a summer long trading range, suggesting investors are comfortable waiting for a significant breakout in either direction. "The price action is bound to undermine the conviction of both the dollar bulls and bears," said Marc Chandler, partnerwith Terra K Partners LLC, a financial firm in New York. "And with the summer holidays here and the absence of much in the way of key economic data, the simplest and most likely scenariois for a range trading affair," he said.

Speculators established a small net short dollar position for the first time in over four months, according to the latest IMM data for the week ended Aug. 16. As a testament to recent strength in sterling, short term investors have flipped to a net long position in the currencyfor the first time since early May. Sterling was relatively unchanged at 1.7964, whilethe dollar was up 0.2 percent against the Swiss franc at 1.2745 francs. The dollar also hit a one week high of 110.83 yen before trimming its gains to 110.43 yen, nearly flat from the prior session.
Technical analysts at Merrill Lynch said the dollar fell slightly short of closing above the key level of 110.80 yen.
"A decisive close above this level would neutralize third quarter downside risk, and improve the opportunity for a renewed challenge to 113.00," they wrote in a research note. Analysts say investors will remain cautious about buying yen aggressively ahead of Japan's Sept. 11 election, although expectations are rising that Prime Minister Junichiro Koizumi will gain public support for his reform plans. Little major U.S. economic data are due next week, and Japanese trade figures are due only on Thursday, leaving markets stuck in waiting mode.

FOMC on autopilot for 10th straight rate hike

WASHINGTON (AFX) The FOMC is expected to hike rates by a quarter percentage point on Tuesday and stick closely to past statements about the economy. "The Fed looks to be on autopilot, set to raise rates a quarter point at every meeting until GDP growth is closer to 3 or the job market flags," said Avery Shenfeld, economist at CIBC World Markets in Toronto. But analysts are wondering whether the central bank might express some greater unease about the outlook for inflation. This would not so much indicate that the Fed was going to increase the size of its rate hikes, but that the duration of higher rates may be longer than the market now expects. The FOMC is expected to raise the Fed funds rate by a quarter percentage point to 3.5, the tenth straight meeting with a quarterpoint hike. The central bank's statement released following the meeting is seen repeating that rates remain accommodative, which can be removed at a "measured pace." Recent revisions show the Fed's favorite gauge of inflation, the core personal consumption expenditure index, has been generally higher over the past year than previously thought. "There may be a slightly more worried tone about inflation," said Josh Shapiro, chief U.S. economist at MFR Inc. There were hints in the minutes of the FOMC's June 29-30 meeting that Fed officials are divided into several camps about how high rates must go in the current tightening cycle, said Dan Seto, senior economist at Sumitomo Mitsui Asset Management, "I think the ongoing tension within the FOMC is the thing to watch," Seto said. But some economists said they were not expecting any significant changes to the Fed statement, "I don't think we'll get any statement changes only because they seem so unwilling to provide hints like that," said James Glassman, economist at JP/Morgan Chase.

Given the recent string of strong economic reports, including Friday's strong 207,000 increase in nonfarm payroll jobs in July, some economists see the Fed's steady rate hikes continuing through the middle of next year. Seto of Sumitomo said he sees the Fed funds rate reaching 5 by the middle of next year. Some economists are worried that the Fed might overshoot, hiking rates too much and slowing the economy. "I think the Fed is going to keep raising rates until it says 'oops'," said Robert Brusca, chief economist at FAO Economics. The key economic reports will come after the FOMC meeting, with the Commerce Department releasing the July retail sales data on Thursday and the June trade deficit on Friday. Economists surveyed by MarketWatch are expecting a 1.8 gain in July retail sales, just ahead of the 1.7 rise in June. It would be the strongest sales month since September 2004. The retail sales report will be released at 8:30 a.m. Eastern on Thursday. Excluding autos, sales are expected to be up 0.6, compared with a 0.7 rise in June. Sales of cars and trucks posted a 20millionunit annual pace in July, the highest since October 2001. The June trade deficit is expected to widen slightly to 56.9 billion from 55.3 billion in May. One lesser known report may get greater attention than usual on Tuesday before the Fed meeting, when the Labor Department releases its second-quarter productivity report, which includes an estimate for unit labor costs in the April-June quarter. Unit labor costs are expected to 3.0 rise, after rising 3.3 in the first quarter. Fed chief Alan Greenspan said the central bankers would be paying close attention to any increase in the costs of labor, which could be passed on to consumers in the form of higher prices