Dollar rises but market wary of Katrina effect

By Chikako Mogi

TOKYO, Sept 7 (Reuters) - The dollar edged up on Wednesday but investors stayed wary of what implication Hurricane Katrina might have on U.S. economic growth and whether it will deter the Federal Reserve from raising interest rates further.

The dollar has bounced off recent multi-month lows as worries about the economic impact from Katrina were seen overdone.

Some market participants said the dollar could retreat leading up to the Federal Reserve's meeting on Sept. 20 given uncertainty about whether the central bank will pause its year-long campaign of raising rates.

"The trend for the dollar remains unclear, but risks are for dollar weakness at the moment," said Junya Tanase, forex strategist at JPMorgan Chase Bank. But others said the rise in oil prices to record highs above $70 last week has fuelled worries about mounting inflationary pressures, which could prompt the Fed to stick to its "measured" pace of credit tightening to ensure stable economic growth.

"The dollar had been oversold on worries that damage inflicted by Katrina would be extensive and very serious," said Mitsuru Sahara, senior trader at UFJ Bank.

He said such worries were fading as oil production in the Gulf of Mexico and refinery operations along the Gulf Coast recover after the hurricane and help push oil prices to two-week lows.

The dollar was also supported after U.S. Treasury Secretary John Snow said that economic stimulus from rebuilding efforts in the wake of Katrina would likely boost gross domestic product in 2006 after weighing on growth for the rest of 2005.

The dollar bought 109.95 yen, up from 109.66 yen in late U.S. trade. The euro was little changed at $1.2465.

The dollar eased against the yen earlier in the session on selling by a big Japanese bank and various domestic investors on a bearish outlook for the U.S. currency, a trader at a Japanese bank said.

But it was seen recouping those losses on buying from importers, mutual funds and other institutional investors.

ELECTION WILD CARD

For clues about the effect of Katrina on monetary policy and the economy, the market will take a close look at the Fed's beige book, which outlines business conditions across the nation, and tune in to a speech by Fed Bank of Chicago President Michael Moskow.

Both events are slated for later in the session.

The Fed has hiked rates at 10 straight meetings since June 2004, raising its funds rate to 3.5 percent from 1 percent and helping to push the dollar broadly higher in the first half of the year.

Fed economist Robert Eisenbeis said on Tuesday that damage by Katrina to economic growth would likely be short-lived and would not change the underlying dynamics for which the Fed has set monetary policy.

Some traders said that Sunday's election in Japan could be a wild card for the market's near-term direction.

Players who have bought the yen on a bet that Prime Minister Junichiro Koizumi will be victorious, could take profits on the currency if he wins. But if Tokyo share prices keep rising, it could open the way for full-fledged buying of the yen.

Elsewhere, the Reserve Bank of Australia kept rates at 5.5 percent on Wednesday, as widely expected.

Later in the session, the Bank of Canada will announce its rate decision, with traders widely expecting an increase of 25 basis points to 2.75 percent.

The Bank of Japan and the Bank of England are both expected to keep rates unchanged when they make announcements on Thursday.

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source: reuters

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