Dollar slips but poised near highs

By Eric Burroughs

TOKYO, Oct 5 (Reuters) - The dollar slipped on Wednesday but held near a three-month high against the euro and a 16-month peak versus against the yen as more Federal Reserve officials made clear U.S. interest rates are heading even higher.

Philadelphia Fed President Anthony Santomero was the last of three policymakers to signal on Tuesday the central bank's plans to tighten monetary policy further, saying the Fed was somewhat more worried about inflation compared with a year ago.

Dallas Fed President Richard Fisher said core consumer price inflation was running at the upper end of the Fed's tolerance zone and "shows little inclination to go in the other direction".

The array of Fed remarks signaling that its 15-month credit tightening campaign is not yet close to finishing has revived the U.S. currency's rally this year by heightening the allure of dollar deposits and yields.

Profit-taking pushed the dollar slightly lower after the U.S. currency had trouble extending big gains from earlier in the week, stymied against the euro at $1.19 and versus the Japanese currency near 114.50 yen.

Analysts said the Fed's vocal campaign of declaring its intention to stamp out any building inflationary pressures was boosting investors' faith in the dollar.

"What matters for currencies are expectations of inflation," said currency strategists at JPMorgan Chase in a note to clients.

"So far this week, hawkish comments by the Fed have managed to control these worries, suggesting that investors have become more confident that the Fed will hike rates enough to slow down the economy and control future inflation," they said.

The euro bought $1.1935, after it fell to a fresh three-month low of $1.1900 on Tuesday on electronic trading platform EBS.

So far the single currency has withstood attempts to take out suspected stop-loss orders at $1.19, which to some analysts suggests that speculators may be poised to reverse their bets for a deeper euro slide.

One trader at a European investment bank said the dollar was poised for a correction and that equity portfolio managers were good euro buyers on any drop. The FTSEurofirst 300 share index has scaled 3-1/2-year highs this week.

Against the yen, the dollar was down 0.3 percent to 113.85 yen after having climbed to around 114.40 yen, the highest level since late-May 2004.

Repeated dollar selling from Japanese exporters repatriating overseas profits has blocked the currency's advance, traders said.

THE LOWLY YEN

The yen has suffered from hungry investor demand in Japan for mutual funds offering higher-yielding foreign bonds, helping drive it to eight-year lows against the New Zealand dollar and near seven-year troughs versus the Australian dollar.

Investors widely expect the Fed to raise its funds rate to 4 percent or 4.25 percent by the end of this year from the current 3.75 percent, and expectations have mounted for more such tightening next year.

The Fed has repeated that the current accommodative policy needs to be removed at a "measured" pace and aims to take rates to a neutral level that neither hinders nor spurs growth.

Steady rate increases from the Fed have contrasted with the euro zone and Japan, where overnight rates have been stuck at 2 percent and virtually zero percent. Rising U.S. rates have also eroded the appeal of higher-yielding currencies, such as the Australian and New Zealand dollars and the British pound.

Fed policy tightening has been the main driver behind the dollar's gains so far this year, pushing the greenback up about 14 percent against the euro and Swiss franc and 11 percent versus the yen.

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source: reuters

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