Dollar rises to one-week high against euro

THE dollar rose to a one-week high against the euro yesterday after the Federal Reserve suggested on Tuesday it may raise interest rates sooner than investors expected.

Yields on US debt securities rose, boosting their appeal to international investors.

A rate increase by the Fed also would signify stronger economic growth, attracting foreign investment in shares of US companies. “As rates start to back up, in anticipation of stronger economic data and tighter monetary policy,” investors may be drawn to higher potential returns on dollar-denominated investments, said Marcel Kasumovich,

Merrill Lynch & Co’s head currency strategist for the Group of 10 industrialised nations.

The dollar strengthened to $1.2443 per euro at 10.15am in New York yesterday from $1.2469 late on Tuesday. During the Tokyo trading session it reached $1.2410, its strongest against the 12-nation European currency since January 20.

The dollar fell against the yen, to 105.77 yesterday from 106.23 yen late on Tuesday, after the government said international investors added to their holdings of Japanese stocks for a fifth consecutive week.

On Tuesday, the US currency advanced 1.4% against the euro after Fed policy makers dropped from their statement on monetary policy their commitment to keep the benchmark interest rate low “for a considerable period.” Fed policymakers have kept their target for overnight loans between banks, or federal funds, at a 45-year low since June.

A majority of economists at Wall Street’s largest bond-trading firms polled by Bloomberg News had expected the Fed to repeat the pledge to keep rates low “for a considerable period.” “With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation,” the statement said.

The dollar fell 17% against the euro last year as higher interest rates in Germany, Australia and the Britain lured investors.

The Bank of England, which raised its benchmark rate a quarter point in November, may increase its target to 4% next month, according to all 28 economists surveyed by Bloomberg News on Friday last. Central banks in Australia, New Zealand and Britain are already increasing rates.

The Reserve Bank of New Zealand raised its rate by a quarter point to 5.25%, widening the yield gap against the Fed’s overnight rate to 4.25percentage points.

Bank of England policymakers will raise their benchmark by a quarter point to 4% next week, according to all 28 economists polled by Bloomberg News Friday last. The bank increased borrowing costs by a quarter point in November. The dollar’s advance was limited as some analysts said the Fed’s change in language did not signify an imminent rate increase.

“Once the dust does settle and the market recognises the Fed is not going to rush headlong into raising rates, that will support euro-dollar,” said Ian Gunner, head of foreign exchange in London at Mellon Financial Corp, who predicts the dollar will weaken to $1.27 by the end of March.

Bloomberg