May 4, 2005
Bloomberg
The dollar fell the most in two weeks against the euro after the Federal Reserve said yesterday U.S. spending growth is slowing, spurring speculation the central bank may ease the pace of interest-rate increases.
``People are going to question just how much more tightening we're going to get this year,'' said Michael Metcalfe, senior strategist in London at State Street Global Markets, a unit of the largest provider of investment services to institutions. ``The pressure on the dollar is going to continue.''
The Fed said in a statement after raising its target rate for the eighth straight meeting that recent data suggest ``spending growth has slowed somewhat.'' The Institute for Supply Management may say today its gauge of the U.S. services industry fell in April, according to economists surveyed by Bloomberg.
Against the euro, the dollar dropped to $1.2935 at 8:56 a.m. in London, from $1.2872 late yesterday in New York, according to electronic foreign-exchange trading system EBS. It also fell to 104.73 yen, from 105.08. The U.S. currency may decline past $1.30 per euro today, Metcalfe said.
Trading may be less than usual in the $1.9 trillion-a-day currency market because of holidays in Japan yesterday, today and tomorrow.
A widening gap in interest rates between the U.S. and the European Central Bank had helped send the dollar up 4.7 percent versus the euro so far this year. The Fed's rate is now 3 percent. The ECB will today keep its benchmark unchanged at 2 percent, according to all 49 economists in a Bloomberg survey.
PIMCO'S CALL
Fed policy makers may be nearing the end of their series of rate increases, according to Bill Gross, chief investment officer in Newport Beach, California, at Pacific Investment Management Co. The manager of the world's biggest bond fund predicted in an interview after the Fed's decision that ``they stop somewhere in the 3.25 percent to 3.5 percent zone.''
The Fed announced yesterday it had mistakenly left out a sentence in the initial statement. The central bank restored language from the previous statement in March that ``longer-term inflation expectations remain well-contained.'' Policy makers retained their plan to raise rates at a ``measured'' pace.
``Once the Fed signals it is done, the key support that has been driving the dollar higher in the past couple of months will be kicked away,'' said Callum Henderson, chief global currency strategist at Standard Chartered Plc. in Singapore. The dollar may weaken to $1.35 per euro this year, he said.
The ISM's non-manufacturing index probably fell to 61 in April from 63.1 in March, according to the median estimate of 67 economists in a Bloomberg survey. The report is scheduled for release at 10 a.m. New York time.
YIELD GAP
Losses in the dollar may still be limited because of the higher yields offered by U.S. Treasury securities compared with the euro region, said Alex Sinton, a trader at ANZ Investment Bank on Auckland.
The extra yield that U.S. two-year notes offer over like- maturity German bonds widened today to 1.43 percentage points, the most since June 2000. The gap has widened as the Fed lifted rates while the ECB kept them unchanged. The Fed's target rate for overnight loans between banks now exceeds the ECB's benchmark by 1 percentage point, the most since March 2001.
``People have to wake up to the fact that the U.S. has a 1 percent interest-rate differential, and there are real risks around the ECB situation'' because of faltering growth in Europe. The euro will probably weaken to $1.27 this week, Sinton said.
Gains in the euro accelerated when it rose past $1.2920 and $1.2950, levels at which some traders had placed orders to buy the currency, said Sabrina Jacobs, a currency strategist in Singapore at Dresdner Kleinwort Wasserstein. Traders sometimes place such orders to limit losses in case their bets go wrong. The euro may strengthen to $1.3150 this week, Jacobs said.
CHINA CURRENCY POLICY
Japan's currency also gained on speculation China may be moving closer to loosening its fixed exchange rate for the yuan.
Japanese Finance Minister Sadakazu Tanigaki yesterday said he and his counterparts from China and South Korea discussed the yuan peg during talks in Istanbul, without giving details. China is Japan's biggest export market, and a stronger yuan would increase China's buying power.
``These discussions keep the ball rolling toward revaluation,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets. ``This is providing some support for Asian currencies.''
Shinzo Abe, acting secretary general of Japan's Liberal Democratic Party, and U.S. Treasury Secretary John Snow agreed on the need for China to move to a flexible currency exchange rate, Kyodo News reported.
To contact the reporter on this story:
Steve Rothwell at srothwell@bloomberg.net
Last Updated: May 4, 2005 03:58 EDT
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