Ye Xie and Bo Nielsen – “Dollar Rises Versus Euro on Comments From Paulson, Fed Official”

Dollar Rises Versus Euro on Comments From Paulson, Fed Official

Ye Xie and Bo Nielsen | July 22, 2008

The dollar rose the most against the euro in more than two weeks as Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.

The greenback extended its gain after breaking through $1.59, where orders to sell the euro were clustered, and increased further as crude oil prices fell, traders said. Mexico’s peso touched a five-year high as economists predicted central bank policy makers will raise borrowing costs next month to curb the highest inflation in more than three years.

“There’s growing opinion that the dollar is trying to bottom,” said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. “There’s a coordinated effort trying to prop up the dollar. The Fed is very concerned about inflation.”

The dollar increased 0.9 percent to $1.5779 per euro at 4:25 p.m. in New York, from $1.5922 yesterday. It touched $1.5758, the strongest since July 10. The dollar advanced 0.7 percent to 107.20 yen, from 106.45, and reached 107.45, the highest since July 9. The yen rose 0.1 percent to 169.26 per euro, from 169.48. It fell to a record of 169.91 yesterday.

The Mexican peso increased as much as 0.7 percent to 10.0568 versus the dollar, the strongest since October 2002. Banco de Mexico policy makers will raise the target lending rate by a quarter-percentage point to 8.25 percent at their next meeting Aug. 15, according to the median estimate of 23 analysts in a survey by Citigroup Inc.

`Boost Confidence’

The dollar strengthened today as Paulson said in a speech in New York that he’s “confident” that lawmakers will pass the bill to “boost confidence” in Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing. He reiterated that a strong dollar is “really very important.”

The U.S. currency touched the record low earlier this month on concern the companies, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, may fail to survive the housing slump.

“His comments helped the market get over the mass hysteria about Fannie and Freddie,” said Brian Dolan, chief currency strategist at, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.

Philadelphia Fed President Charles Plosser said in a speech today in King of Prussia, Pennsylvania, that the U.S. central bank should raise interest rates “sooner rather than later.” He argued against reductions in two Fed decisions this year.

The two-year Treasury note’s yield rose 12 basis points, or 0.12 percentage point, to 2.72 percent. The rate was 187 basis points lower than that of the comparable-maturity German bund, narrowing from 203 basis points yesterday.

`Hawkish Comments’

“Plosser’s hawkish comments pushed Treasury yields higher,” contributing to the dollar’s turnaround, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

Futures traded on the Chicago Board of Trade showed a 49 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 41 percent odds yesterday. Policy makers next meet Aug. 5.

Crude oil for August delivery fell 3.1 percent to $127.95 a barrel after touching $125.63, the lowest level since June 5. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

ECB Stance

The euro traded earlier near the all-time high versus the dollar as the Italian daily publication La Stampa reported that European Central Bank executive board member Lorenzo Bini Smaghi said the bank’s main refinancing rate isn’t “exactly restrictive” at 4.25 percent.

“The ECB has continued to make hawkish noises, meaning the euro is going to be quite well-supported in the near term,” said Ian Stannard, a London-based senior currency strategist at BNP Paribas SA. The dollar may still rebound to $1.50 per euro by the end of the quarter, he said.

The Canadian dollar fell 0.9 percent to C$1.0085 per U.S. dollar, the biggest decline this month, as crude oil prices dropped. Commodities such as oil and gold make up half of the country’s exports. The currency started weakening on a report that showed retail sales rose in May less than forecast.

The Czech koruna fell 2.4 percent against the euro, the most since October 1999, after Governor Zdenek Tuma of the central bank said policy makers may reduce interest rates as soon as next month because the koruna’s advance threatens to “damage” the economy. The koruna fell to 23.485 per euro, from a record high of 22.877 set yesterday. It has gained 13 percent against the euro this year for the best performance among currencies of developing countries.

Published in: on July 22, 2008 at 9:47 PM  Leave a Comment  

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