Dollar hits two-month high on euro

THE dollar struck a two-month high against the euro yesterday, driven by the belief the US Federal Reserve may introduce a tough interest rate regime.

Concerns are beginning to emerge about the inflation rate outlook in the US as the economy gets back on to trend growth. As a result of such expectations the dollar climbed from $1.2811 to the euro on Monday to $1.2809 yesterday.

How long this will last is hard to judge. If Federal Reserve chairman Alan Greenspan signals tougher measures then the dollar could continue to rally.

“There’s an opportunity for Greenspan to begin to signal the possibility of having a more flexible approach to tightening”, said Ian Stannard, currency strategist at BNP Paribas.

While the euro also slipped against sterling yesterday economists in Britain regard the dollar rally as temporary. Issues will come back to haunt the currency, said Mr Stannard.

In Dublin, Niall Dunne, economist, Ulster bank Markets, warned rising rates could hurt the dollar long term. He is bearish on the dollar and still believes it could end this year at $1.40 to the euro.

While the tightening by the Fed may put some support under the dollar in the short term Mr Dunne said history was against the trend. In 1994 when the Fed raised rates from 3% to 6% in the space of 12 months the dollar fell to a decade-low against the German mark at the time from DM1.75 to DM1.37.

Mr Dunne said the US still has huge credibility issues over its deficits and questions the ability of the dollar to be able to withstand that pressure in the coming months.

In the oil markets, oil prices raced to all-time peaks yesterday, climbing towards US$58 a barrel as Opec said it had begun discussing a second output rise to try to quell the market’s rally.

US light crude hit a record US$57.79 a barrel, surpassing Friday’s high of US$57.70, which was triggered by a forecast that prices could spike above US$100 because of strong global demand and tight spare capacity.

US crude was up 21 cents at US$57.48. London’s Brent crude was trading 26 cents higher at US$56.79, just off a new record of US$57.05.

“I would have thought prices would struggle to go much higher. The market fundamentals suggest lower prices”, said Mark Pervan, an analyst with Daiwa Securities in Melbourne.

Most energy analysts on Wall Street expect oil prices to remain high for the foreseeable future because of strong demand and limited supply. Tim Evans on the other hand says that prices cold be down to $28 a barrel by the summer.

Crude-oil prices above $50 a barrel reflect nothing more than a market bubble fed by speculation and unwarranted fear. Mr Evans, a senior analyst at IFR Energy Services in New York, thinks oil prices could plummet to $28 a barrel as early as summer.

His basic message is that the world’s oil supply is sufficient to meet demand, that motorists soon will show that they’re not willing to pay any price for petrol, and that the market is unreasonably receptive to worst-case-scenario thinking.

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