Dollar meanders as traders mull oil price impact

TOKYO, Aug 31 (Reuters) - The dollar was trapped in narrow ranges against major currencies on Wednesday as investors struggled to sort out what record-high crude oil prices mean for currencies and the global economy.

Dealers said worries that crude oil prices of over $70 a barrel would slow consumer spending in the United States were keeping investors cautious, even in the face of U.S. data on Tuesday that showed the American consumer was holding up well.

The surge in oil prices has raised doubts about whether the Federal Reserve will keep raising interest rates into 2006, continuing the tightening campaign that has helped the dollar rebound this year from a three-year slump.

Minutes on Tuesday from the Federal Reserve's August meeting showed most policy-makers were worried inflation risks had "ticked up" recently. But they also suggested the Fed was concerned rising energy costs might force a slowdown in consumer spending.

The oil price spike has also led some traders to bet that the economies of export-dependent Asian economies such as Japan will slow, hurting their currencies.

"It's really tough trying to guess the impact of higher oil prices, but people's first instinct seems to be to sell the yen, then the dollar," said Noriyuki Kubo, forex planning manager at Resona Bank in Tokyo.

Morgan Stanley currency strategist Stephen Jen said in a research note that higher oil prices were "unambiguously bad" for Asian countries including Japan, most of which are almost entirely dependent on imported oil for their energy needs.

The dollar edged up against the yen in early trade, but was beaten back down as Japanese exporters took the chance to sell dollars at close to a three-week high.

The dollar was at Y111.25 yen as of 0330 GMT, barely changed on the day but still not far off a peak around 111.60 yen hit on Tuesday.

The yen has now retreated more than two yen from a three-week high of 109.05 to the dollar hit on Aug. 16.

Foreign investors were heavy buyers of Japanese stocks earlier in the month, spurred by signs of an improving economy and polls suggesting that reformist Prime Minister Junichiro Koizumi would fare well in an election in September.

HURRICANE KATRINA

The euro was trading at around $1.2225, also barely budged from late U.S. trade.

Dealers said the dollar was gaining support against the euro from talk European insurers were buying dollars to cover insurance claims resulting from the massive damage caused by Hurricane Katrina. The claims are estimated at up to $25 billion.

The dollar was boosted in part on Tuesday as the Indonesian rupiah tumbled by almost 9 percent to a four-year low against the U.S. currency, which put pressure on Asian currencies including the yen.

The rupiah weakened again on Wednesday, with Indonesia later in the day expected to unveil a series of fresh steps to rescue the rupiah currency and restore financial market confidence.

Trading activity was muted as the market also readied for a series of big U.S. economic reports later in the week that include the Institute for Supply Management's manufacturing survey on Thursday and a nonfarm payrolls report on Friday.

Traders are keeping an eye on oil prices after Hurricane Katrina sent crude prices to a record high of $70.85 on Tuesday.

So far oil prices, which have risen more than 60 percent this year to date, inflating the cost of gasoline, appear to have done little to deter the ever-resilient U.S. consumer.

The Conference Board's U.S. consumer confidence index rose to 105.6 in August, far above economists' median forecasts.

Most analysts still expect the Fed to raise its funds rate to at least 4.00 percent by the end of the year, extending a string of 10 straight rate rises from the central bank.

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source: reuters

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