Dollar falls on U.S. rate uncertainty after Katrina

By Rika Otsuka

TOKYO, Sept 5 (Reuters) - The dollar crept back towards a three-month low against the euro on Monday due to uncertainty about how high U.S. interest rates would climb and how much Hurricane Katrina would curb economic growth.

A series of weaker-than-expected economic data last week has prompted some investors to conclude that the Federal Reserve could pause its rate tightening campaign at its Sept. 20 meeting to assess the fallout from Katrina.

Traders said the market would keep an eye on upcoming weekly snapshots of retail sales, jobless claims and consumer confidence for clues about what impact the hurricane has on policy.

U.S. Treasury Secretary John Snow said on Friday that Katrina, which ripped up the Gulf Coast and sent flood waters pouring into New Orleans, could slow U.S. economic growth for a quarter or so, though it would not have a lasting impact.

Soaring oil prices, which hit a record-high $70.85 last week as Katrina ruptured the U.S. oil industry, were also seen undermining U.S. economic growth.

"While few see a long-term effect from the hurricane on the overall U.S. economy, the dollar is being sold on surprise that damage caused by the hurricane was more serious than previously thought," said Kikuko Takeda, a market economist at Bank of Tokyo-Mitsubishi.

"The market may continue to focus on the impact of Katrina for now."

By 0340 GMT, the euro was buying $1.2575, up from $1.2530 in late trade on Friday when it hit a three-month high of $1.2590.

The dollar fetched 109.20 yen, down from around 109.80 yen and near a two-month low below 109 yen.

The dollar gave up 0.4 percent versus the Swiss franc to hover around 1.2255 francs.

Traders said that currency moves were exaggerated by thin volume as U.S. markets are closed on Monday for Labor Day.

FED ON RADAR

The Fed has raised its funds rate 10 straight times since June 2004 to 3.50 percent, with the rate advantage helping to propel the dollar 8 percent higher against the euro and 7 percent versus the yen this year.

Previously, many traders and analysts had expected two or three more rate hikes by year's end. But more and more market players have revised their forecasts, seeing one or two more rate rises and the end of the current tightening cycle soon.

Some players have even started to think the Fed might skip a rate increase at its monetary policy meeting this month because of Katrina.

The market is eager to hear from Fed board members, and both Chicago Fed President Michael Moskow and San Francisco Fed President Janet Yellen are slated to speak this week.

The yen, meanwhile, was underpinned by a range of factors, including media polls showing firm support for Japanese Prime Minister Junichiro Koizumi's party ahead of the Sept. 11 general election.

The Nikkei stock average hit a fresh 4-year intraday high on Monday, while a Finance Ministry survey showed that Japanese firms boosted capital spending in the April-June quarter from a year ago despite surging oil prices.

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source: reuters

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