LONDON, June 20 - The dollar steadied on Friday, nursing losses from the New York session after a key regional U.S. manufacturing survey deflated recovery hopes and rekindled expectations of an aggressive U.S. interest rate cut next week. The dollar stood at $1.1690 per euro at 0735 GMT, up a touch from the New York close but down more than a cent from one-month highs scaled early on Thursday. The greenback was steady at 118.25 yen . After strong gains earlier in the week, the U.S. currency turned tail in Thursday's New York session after a manufacturing index from the Philadelphia Federal Reserve failed to back optimism generated by another regional manufacturing survey on Monday.
"The dollar is gyrating on U.S. interest rate expectations as there is a lot of confusion as to how aggressively the Fed will cut," said Mitul Kotecha in Credit Agricole Indosuez. "The Philly Fed was not a bad number but disappointed optimists after the very strong Empire State manufacturing survey earlier this week." The Federal Reserve Bank of Philadelphia said on Thursday its index of factory business conditions rose to 4.0 in June from -4.8 in May. Some in the market had expected a sharper rebound, however, after a strong Empire State survey, a gauge of New York manufacturing conditions, on Monday.
RATE DEBATE RAGES
The U.S. central bank meets to discuss interest rates on June 24-25 and is widely expected to cut rates. The big question is by how much. With little fresh guidance from Fed policymakers themselves, investors have paid an unusually large amount of attention to newspaper commentaries. On Thursday, a Washington Post article argued that a 50 basis point cut from the Fed was more likely, but a Wall Street Journal article on Friday quoted unnamed Fed officials saying a quarter-point cut could not be ruled out. In a yield-driven market, most analysts feel a larger cut would hurt the dollar, but not everyone is convinced. "Is 25 good or bad or is 50 good or bad? No one knows because we're on a potential changeover from yield-driven markets to growth driven markets," said Lee Ferridge, head of global currency strategy at Rabobank. "If the equities guys are dominating FX then 50 is good for the dollar. If the yield guys are dominating then 50 is bad."
JGB RECOVERY
A swift rebound in JGB prices helped ease worries that interest rates could skyrocket and decimate the value of Japanese banks' huge bond holdings. On Friday, the benchmark 10-year JGB yield fell a hefty 10 basis points to 0.585 percent after having risen more than 20 basis points at one point the day before. But the yen's gains were capped by wariness about Japanese intervention, with some traders reporting irregular bids around 118 yen that could be from the Bank of Japan. Japan has repeatedly intervened to stem the yen's strength this year, fearing a rise in the yen would hurt exports, the main engine of the economy.//