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Dollar pushes to five-month peak vs yen

NEW YORK: The dollar climbed to fresh five-month highs against the Japanese yen on Thursday after Federal Reserve Chairman Alan Greenspan said interest rates may need to rise more to help cool America's robust economy.

While the tone of the Fed chairman's twice-yearly testimony to Congress was decidedly hawkish, fallout from the remarks was limited by the perception that the Fed would likely stick to a gradual approach to nudging interest rates higher.

The dollar firmed against the yen overnight when Moody's Investors Services warned it may lower its debt rating for Japan's government, then it pushed to a fresh high of 110.65 yen in US trade, a 1.1 percent gain from Wednesday.

The greenback ended the day a touch lower against Europe's single currency but largely wiped out strong gains the euro made overnight on strong German economic data.

"The initial reaction to to Greenspan's comments was that they were stronger than usual and more hawkish than usual, specifically when he mentioned the need to substantially raise interest rates," said Alex Beuzelin, forex market analyst at Ruesch International.

But Greenspan's reaffirmation that a "stable and incremental" monetary policy is the best course for the Fed whenever possible helped take the sting out of his earlier remarks and soothed the market, Beuzelin added.

While Greenspan's comments helped push blue-chip US stocks and Treasury prices lower, the Nasdaq coposite index powered 2.74 percent higher to a record 4,548.87.

Reporting to Congress about America's economy and monetary policy, Greenspan said the Federal Reserve's rate-setting Open Market Committee "will have to stay alert for signs that real interest rates have not yet risen enough to bring the growth of demand into line with that of potential supply, even should the acceleration in productivity continue."

His testimony, long billed as the week's most important event for the markets because it could offer hints on the pace of credit tightening, surprised analysts and dealers when it appeared much more blunt about the need to raise rates.

"This testimony is more hawkish because it refers to speed which was not priced into the market," Warburg Dillon Read analyst Tomas Jelf said.

The Federal Reserve has raised rates four times since June 1999 and dealers are virtually sure policymakers will push the 5.75 percent federal funds rate up more in March.

In late US trading, the euro was slightly firmer against the dollar near 98.80 cents, but still well below the 99.56 session high it hit overnight after Germany's key Ifo business sentiment index rose to 100.1 in January, topping economists' forecast for a rise to 99.9 from 99.6 in December.

The euro EURJPY also gained strongly against the yen with a gain of about 1.3 percent on the day, but failed to retest the three month high hit overnight above 110 yen.

Dealers said the euro had been whiplashed by profit-taking after it was unable to break through the one-on-one parity level with the dollar it fell through late last month, and pegged the euro's moves largely on technical factors.

"It's been really confusing," said Grant Wilson, vice president and trader at Mellon Bank in Pittsburg. "When you step back from the market, it's directionless right now."

The European Central Bank, which hiked rates in early February to battle rising inflationary pressures as the euro tumbled to ever deeper lows, kept rates steady on Thursday.

The currency markets largely shrugged off comments from ECB chief economist Otmar Issing, who said the euro zone's economic outlook for 2000-2001, was better than in the past 10 years.

But dealers said Europe's prospects were no match for the booming US economy.

For the United States there was more good news when the government said its producer price index was unchanged in January after a 0.1 percent rise in December.

Excluding the food and energy components, prices fell 0.2 percent in January after rising 0.1 percent in December. Economists had expected a slight rise in the index.

And traders were anticipating more news on the US inflation front in the form of the Consumer Prices Index, set for release on Friday. Currency bid prices at 2201GMT. All data taken from Reuters with percent change calculated from the daily US close at 2130GMT.-Reuters