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Dlr rises, shrugs off trade data, awaits Fed

NEW YORK: The dollar drifted higher on Tuesday, ignoring news that America's trade deficit had swelled to a new record, and waited instead for fresh trading incentives from an afternoon decision on US interest rates.

With only a few hours to go before the Federal Reserve's policy-setting Federal Open Market Committee issues its rate announcement, trading was lackluster because investors had largely stepped to the sidelines before the news.

The dollar held gains of about 0.30 percent against the yen and the euro, trading near 106.70 yen and 96.97 cents per euro as US activity got under way.

For weeks, all of Wall Street's 30 primary dealers have said the Fed would push its key federal funds rate, the rate which banks charge each other for short-term loans, up a quarter point to 6 percent to prevent economic overheating.

Interest rate sensitive stock and bond markets appear to have made peace with the expected news and currency traders said the dollar should remain supported even if US asset markets briefly dip lower after the Fed's statement.

"The main thing will be for the market to sit tight until the Fed's announcement," said Rick Gomes, managing director of foreign exchange at HSBC in New York.

The market "had been prepared for ugly trade numbers but as long as we remain a magnet for capital the dollar will do well," he added.

Earlier the Commerce Department said America's trade deficit ballooned to a record $28 billion in January, rising nearly 14 percent from December's downwardly revised $24.61 billion shortfall.

Higher oil prices coupled with consumers' huge appetite for items including foreign-made cars and computers helped push imports to an unprecedented $112.07 billion while exports stood at $84.06 billion.

Even though many analysts and officials have continued to worry that foreigners may soon tire of funding America's growing current account deficit, there was no real reaction in the currency market to these numbers.

"We should react to the trade numbers but really have not for some time," a trader said.

Overnight, the euro received a small boost when Germany's Ifo business climate survey for February jumped to 100.9 for western Germany, beating analysts expectations for a 100.7 reading and a revised 100.2 reading in January.

The euro also pushed to three week highs around 62.10 against the British pound. The pound's slide came despite the release of a stronger-than-expected British inflation report.

While the underlying inflation rate rose to 2.2 percent in February, it remains below the government's 2.5 percent target.

But overall, the euro's gains were limited, dealers said, noting the market had adopted a habit of sending the euro higher in European trading and then pushing it lower again during New York hours.

"We had an Ifo number which is the strongest since German unification and yet the euro continues to perform very badly," said Michael Lewis, analyst at Deutsche Bank in London said.

Dealers said the top of the euro/dollar range is seen near 97.40 cents where dealers reported strong selling interest. On the bottom, dealers do not expect the euro to fall much below 96.80 cents.

Meanwhile the dollar was within 1/2 yen of Monday's 107.10 JPY peak, its highest in 1-1/2 weeks, recovering an earlier dip to 106.28.

Earlier the yen had drawn some support from the Ministry of International Trade and Industry's all-industries index -- a measure of economic activity closely watched by economists to gauge gross domestic product -- which rose 0.5 percent in January after a 0.4 percent gain in December. -Reuters