Posted on 05/18/2005 4:04:34 PM PDT by familyop
LONDON (Reuters) - The two-week dollar rally ran out of steam in European trade on Wednesday as investors awaited U.S. consumer inflation data which could reinforce expectations that U.S. interest rates are set to rise steadily.
Earlier during the session, the greenback hit seven-month highs against an index of currencies.
Investors were caught off guard after the Hong Kong Monetary Authority said it would tweak the territory's currency peg to fend off upward pressure on the Hong Kong dollar from speculation over possible revaluation of the Chinese yuan.
The HKMA said it would refine the operation of its exchange rate linked to the dollar, setting a trading band for the local currency between HK$7.75 and HK$7.85 per U.S. dollar.
The local currency hit a low of 7.8123 per U.S. dollar from pre-announcement levels around 7.7985 before bouncing back to around 7.7969 by 1147 GMT.
In recent weeks rising expectations that China would revalue the yuan, pegged at around 8.28 to the dollar, put upward pressure on Asian currencies including the HK dollar.
"People are still trying to digest the impact of the HKMA move and waiting for U.S. inflation data," said Simon Derrick, head of currency research at Bank of New York.
Tuesday's stronger-than-expected U.S. producer inflation data, along with a recent run of robust figures, eased concerns about a soft patch in the world's biggest economy.
The dollar also drew support from an unwinding of dollar-funded carry trades after recent hedge fund losses and after a hotly awaited U.S. Treasury report released on Tuesday did not say China was manipulating its currency.
U.S. consumer price inflation data is due at 1230 GMT.
"The PPI was stronger than expected and we've also had strong activity data. But we need to have a higher than expected inflation number today to fuel current strong dollar sentiment," said Niels Christensen, senior currency strategist at Societe Generale in Paris.
The dollar rose as high as 86.41 against an index of currencies, its best showing since late October.
The euro gained 0.12 percent at $1.2616 at 1148 GMT, near 7-month lows around $1.2580 set earlier this week.
The dollar was down 0.15 percent at 107.32 yen after matching one-month highs close to 107.80 yen set on Monday.
Dealers said the dollar gained support against the yen after the semi-annual Treasury report on currency practices of trading partners said China did not use its currency to gain an unjust trade advantage in the latter half of 2004.
But the report warned if current trends continued China could be named as a country which did this in the future.
China launched a new forex dealing system on Wednesday that allows trading in currencies other than the yuan.
Chinese premier Wen Jiabao said China will deal with the yuan and other issues in compliance with world rules.
INFLATION FOCUS
The U.S. currency has climbed about 2.7 percent against the euro and 3 percent versus the yen in a rally that began on May 6 on a robust U.S. jobs report and was fueled by other upbeat data, including a slimmer-than-expected trade deficit.
Some analysts said, however, the rally could run out of steam unless the Fed started to suggest a more aggressive pace of rate rises, after having lifted its funds rate by a quarter percentage point at eight straight meetings to three percent.
One development that could give the Fed ammunition for such a move would be a jump in inflation.
Economists in a Reuters survey expect a rise of 0.4 percent in U.S. consumer prices in April compared with an increase of 0.6 percent in March.
Data on Tuesday provided fuel for dollar bulls, showing the U.S. producer price index edged up 0.6 percent in April from a month earlier, compared with forecasts for a rise of 0.4 percent.
U.S. Treasury Secretary John Snow speaks at a lunch in Washington at 1615 GMT.
A weakening dollar and inflation are two sides of the same coin. The real question is: how far will it go before the housing bubble goes bust?
The lower rates for long term bonds due to the economic news today means Greenspan has less room to raise short term rates before inverting the yield curve.
Inflation was reported as lower than expected.
Yes, inflation was lower than expected.
Forex - Dollar lower after benign core US CPI data
Forbes - 10 hours ago
http://www.forbes.com/markets/feeds/afx/2005/05/18/afx2037247.html
"LONDON (AFX) - The dollar was lower after it was revealed that US inflation in April remained benign despite steeper rises in producers' raw material costs. ... "
...just in from Sydney, where it is morning.
Forex - US dollar mixed Sydney morning after falling on benign ...
http://www.forbes.com/business/feeds/afx/2005/05/18/afx2038880.html
Forbes - 43 minutes ago
"SYDNEY (AFX) - The US dollar was trading mixed against major currencies, searching for direction after being hit by a benign US inflation report for April ... "
Bump
Not that it makes much difference, but I calculate it at a compound annualized rate of 7.442%.
It's better news than expected for some us (although, as you say, not really good news in that sense) and worse than expected for others. Importers, exporters, employers, employees and retirees have different (and sometimes competing) interests.
Here's a related piece of interest to some, on Chinese dictators (and many people of certain interests in the USA) trying to keep the yuan from getting closer to the dollar.
China must beware of Congress, Snow says
http://www.freerepublic.com/focus/f-news/1406152/posts
As interests rates rise, people can afford far less of a loan. Prices slammed based on that usually.
Look at Condos and Town Homes. When you see something trend down there, that is the beginning and it will go to housing just after that.
Condos and Town Homes are the last to benefit from a housing trend and the first to go down.
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