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Dollar holds firm ahead of FOMC decision

LONDON: The dollar consolidated across the board after rising to its highest in nearly five months against the yen on Wednesday ahead of a U.S. interest rate decision.

Analysts said the dollar had the potential to move higher with the U.S. Federal Reserve seen capable of engineeringing a soft landing for the longest ever U.S. economic expansion, which was starting its 107th month of unbroken growth.

The dollar was bolstered as U.S. stocks took expectations that the Federal Open Market Committee would raise its 5.5 percent fed funds target rate by 25 basis points at the end of its two day meeting on Wednesday in their stride.

The Dow Jones Industrials Average closed up 0.92 percent on Tuesday.

Some analysts said even a 50 basis point rise would only prompt a temporary negative impact on the dollar given the strength of U.S. data on Friday.

"Any negative reaction today is unlikely to be prolonged," said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi in London. "The dollar may underperform if there is a selloff in the Dow today, but I don't think a 50 basis point hike would herald a trend lower in the Dow."

He said the market's bullish view on the dollar had increased on prospects U.S. interest rates could rise as high as 6.5 percent in the first half of the year while maintaining trend growth of around three percent.

June Eurodollar three-month interest rate futures are at 93.310, pricing in U.S. interest rates of around 6.50 percent.

The dollar was half a yen below its 109.00 peak set in Asia, its highest since September 13 and was within one percent of Tuesday's $0.9960 record low against the euro EUR.

Dollar/yen traded choppily on Wednesday amid conflicting comments from Japanese officials. Jiji news agency said Finance Minister Kiichi Miyazawa denied earlier reports he said he was not seeking a further fall in the yen. Vice Finance Minister Haruhiko Kuroda said Japan's foreign exchange policy remained unchanged, Jiji news agency reported.

Jesper Dannesboe, treasury economist at ABN AMRO in London said the break above 108 yen opened the way for the dollar to go as high as 111.

"You could argue that it shouldn't go too high given that you still have a trend appreciation of the yen based on the massive current account surplus and also on the view that Japan continues to recover and the restructuring continues," he said. "But for the time being you don't want to be short dollar/yen.

EURO DOWNTREND NOT OVER YET

The euro was bolstered after a top economist at Germany's Ifo institute Gernot Nerb said the euro's weakness was exaggerated. Nerb said he was sticking to the Ifo's forecast that the euro would appreciate to $1.05/10 by the end of the year and said there was a 50/50 chance of moderate monetary tightening from the European Central Bank on Thursday.

Nevertheless, analysts said the overall downtrend for the euro was unlikely to be overturned yet.

Halpenny at Bank of Tokyo Mistubishi said the political row over Austria's choice of governing coalition, with mounting criticism of far-right leader Joerg Haider, could become a larger factor for financial markets in the coming days.

"Everybody had questioned the economics of starting EMU in 1999 and becasue it was pushed from the political side what is developing now in Austria can't be good for the whole process," he said. "Disagreements between the governements within the eruo zone can only lead to a further undermining of the currency."

European monetary affairs commissioner Pedro Solbes said it was too soon to speculate on what might happen to the euro should future Austrian government be isolated by its European Union partners.-Reuters