LONDON, June 18 - The dollar hit the week's highs against the yen and the euro on Wednesday as the market scaled back expectations of an aggressive cut in U.S. interest rates next week after firm inflation data the previous session. Markets were also awaiting the verdict in the trial of Bank of France Governor Jean-Claude Trichet, expected at 1130 GMT. If Trichet is found guilty in the banking fraud case, he will lose his bid to become next European Central Bank governor. Meanwhile, dealers are increasingly eyeing Wall Street, aware that U.S. equities could emerge as a potential support for the greenback, with the broad Standard and Poor's index edging up to a fresh one-year high on Tuesday.
U.S. stock index futures were indicating a steady to lower open on Wall Street on Wednesday. "The dollar is gaining, but gradually, on the better data this week and improved stock market outlook," said Lee Ferridge, head of global currency strategy at Rabobank. "If Trichet is not cleared fully then it throws uncertainty over who's going to take over from (ECB President) Wim Duisenberg and the general uncertainty might upset the euro." The dollar rose half a percent to $1.1727 per euro at 0955 GMT, two cents above record lows tested earlier this week. Traders said talk of options barriers at $1.1650 and $1.1950 was keeping the single currency between those levels. "We are seeing a little bit of closing out of short dollar positions," said Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein. Traders also said the dollar was finding support from comments by International Monetary Fund managing director Horst Koehler, who was quoted in a German magazine saying central banks and governments should consult if the dollar should fall further or faster.
The dollar was also nearly half a percent up on the yen, hitting one-week highs of 118.69 . Traders said talk of orders by Japanese monetary authorities to buy dollars for yen at or below 118 was helping to keep the U.S. currency afloat. Japan's top financial diplomat, Zembei Mizoguchi, said on Wednesday he would continue to watch against excessive movements in the currency market. SMALL FED CUT? Markets still expect the Fed to cut by 25 basis point next week to make sure deflation does not take hold of the world's largest economy. Trichet, the anointed successor to Duisenberg, is on trial over his alleged complicity in the publication of misleading accounts at Credit Lyonnais Bank in the early 1990s. Unless he emerges with a complete acquittal, he could lose the ECB race, possibly causing a ripple for the euro. But dealers do not expect a long-lasting effect on the single currency whatever the verdict, as ECB policy is unlikely to be affected. Elsewhere, sterling showed little reaction to the release of Bank of England June 4-5 policy meeting minutes, which showed the panel split 6-3 to hold rates unchanged.
Sterling has benefited from the steady-rate decision, and hit six-week highs against the euro . It shed half a percent on the day against the broadly strengthening dollar after hitting 4-1/2 year highs in the previous session . British Chancellor of the Exchequer Gordon Brown and Bank of England Governor Eddie George speak following the annual Mansion House dinner, which starts around 1900 GMT.//