20000203

Dollar rides high ahead of Fed rate decision

NEW YORK: The dollar scaled a 3-1/2 month peak against the yen and kept the euro pinned near record lows on Tuesday as traders bet modest Federal Reserve interest rate hikes can rein in a booming economy before inflation takes off.

The dollar pushed higher against the yen JPY for the third straight day, rising as high as 107.96 yen, as Fed policy makers began a two-day meeting. The market expects them to edge rates higher to temper blistering economic growth.

"The market is wagering (Fed Chairman Alan) Greenspan will engineer a soft landing," said Anjum Sayyed, senior foreign exchange dealer at Manufacturers and Traders Bank.

"There is no real end to the US economic expansion. That is making people feel confident about holding dollars," Sayyed said.

Leading Wall Street firms unanimously expect the Fed to increase the federal funds rate on overnight bank lending to 5.75 percent from 5.5 percent. Some expect a similar hike in the 5.0 percent discount rate for direct loans to banks.

The Fed is due to make its rate announcement on Wednesday.

Stopping short of key resistance near 108 yen, the dollar closed at 107.79 yen as New York dealing wound down.

The dollar weakened slightly against the single European currency, EURtaking a breather after bashing the euro to record lows in the previous three sessions.

But dealers said the euro looked vulnerable to further declines after an early New York short-covering rally fizzled out near 97.80 cents, knocking the euro back to 97.21 cents at the close.

"Today was a consolidation session waiting for the shoe to drop tomorrow afternoon," said Marc Chandler, chief currency strategist at Mellon Bank.

He said the market had priced in expectations of a series of hikes in the federal funds in coming months, and that a quarter-point rise coupled with a statement of concern at early signs of inflation would largely be a "nonevent" for currency markets.

After the Fed's announcement, Chandler said the focus would turn to the European Central Bank, which will decide on Thursday whether to raise its key 3.0 percent refinancing rate.

"An ECB rate hike now would be looked at as a bit of a panic in response to the weakness of the currency and the ECB does not want to give that impression," Chandler said.

Only one quarter of analysts surveyed by Reuters this week anticipated the ECB would hike rates this week in the face of increased price pressures which ECB President Wim Duisenberg warned this week could be stoked by a weak euro.

But 36 of 41 economists polled by Reuters expected higher euro zone interest rates within the next two months.

Lingering market scepticism about Europe's economic recovery has continued to plague the euro, highlighted by softer-than-expected euro zone manufacturing data overnight.

Against the yen, the dollar's strength has been amplified by Japan's underwhelming economic performance. The yen came under pressure earlier from data showing Japan's unemployment rate rose for the first time in six months in December.

Carl Weinberg, chief economist at High Frequency Economics, said widening interest rate differentials between Japan and the rest of the industrialised world should be a negative for the yen.

"There is no talk of any rate hike whatsoever for Japan," Weinberg said.

"Even though the G7 will not step up to the plate and call it a coordinated move, we are surely looking at a coincidence of rate hikes that will work to cheapen the yen," he said-Reuters