February 2, 2005
By Natsuko Waki
Reuters
LONDON - The dollar drifted lower against the euro and the yen on Wednesday as investors waited for the Federal Reserve to deliver an expected interest rate hike and give clues on the future outlook for monetary tightening.
The Fed is expected to raise rates by a quarter point to 2.5 percent in its sixth tightening since June when it announces its decision at 2:15 a.m. EST. Markets are keen to see if the Fed signals a shift in its campaign of "measured" tightening in the statement.
Investors were hesistant to tilt their positions also ahead of U.S. jobs data and a meeting of Group of Seven rich nations later in the week.
"The dollar's weakness is marginal and people are not willing to take big positions given we have so much news coming out toward the end of the week," said Niels Christensen, senior currency strategist at Societe Generale in Paris.
"The Fed's policy is well directed and it meets expectations so the statement will be crucial. They are likely to be pleased with the labor market and they could voice concern a bit about inflation, but it's hard to see how they can become more hawkish."
The euro was up over a quarter percent from the U.S. close at $1.3070 at 5:40 a.m. EST, after hitting 6-day highs of $1.3095 earlier. It also rose to its highest level in nearly three weeks at 135.80, partly bolstered by buying by Japanese investors of European bonds.
The dollar was at around 103.56 yen, slightly down from late U.S. levels.
Euro zone producer prices fell more than expected in December, driven down by declining energy costs.
German unemployment rose in January to its highest recorded level since 1933 as government labor market reforms and seasonal effects added more than half a million people to the total.
US DATA/G7
The Fed statement is due after the meeting of the policy- setting committee, the first of a series of closely watched events this week that includes U.S. jobs data and a meeting of the Group of Seven (G7) economic powers.
President Bush's State of the Union speech is due later on Wednesday, with traders watching closely for any specific steps to curb a large and growing budget deficit.
Also on Thursday, the European Central Bank announces its interest rate decision. In contrast to the Fed, the ECB is seen leaving rates unchanged at 2 percent at its policy meeting on Thursday.
"Regardless of whether the U.S. indicates a faster pace for rate rises or not, it is certain that the interest rate gap between the U.S. and the euro zone will steadily widen," said Mitsuru Yaguchi, senior economist at Mitsubishi Securities in Tokyo.
On Friday, the market will brace for the U.S. employment report for January and a speech on the U.S. current account by Fed Chairman Alan Greenspan.
Capping the eventful week is the G7 meeting in London on Friday and Saturday, with traders focusing on what the G7 nations will talk about with China.
European monetary policymakers have been urging Asia to let their currencies rise to share the burden of dollar weakness and help correct global imbalances.
A German government source said on Wednesday, however, that China should not be pressured over exchange rate flexibility.
Speculation that China might relax the yuan peg to the dollar soon after the G7 meeting has caused wild swings in the yen in recent weeks. Traders say a yuan revaluation would put upward pressure on other Asian currencies.
Elsewhere, the Norwegian crown was stronger against the euro ahead of an interest rate decision at 8 a.m. EST. Norway is expected to leave rates unchanged at historic lows of 1.75 percent.
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