The dollar rose to a five-month high versus the euro in Europe and gained against 15 of the 16 major currencies on expectations Federal Reserve Chairman Alan Greenspan will today signal interest rates are heading higher. Prospects the Fed will raise its target rate from a 45-year low of 1 percent as soon as September increased after Greenspan yesterday told the U.S. Senate Banking Committee the risk of deflation, a persistent decrease in the level of consumer prices, is ``no longer an issue.'' He will testify to the Joint Economic Committee of Congress at 3 p.m. London time.
``Investors are changing their outlook on the dollar on the basis rates may now be rising,'' said Neil Jones, director of foreign exchange at Nomura International Plc in London. ``The dollar could rise to $1.1750 per euro and 110 yen in the next couple of days.'' Against the euro, the dollar rose to $1.1828 at 9:58 a.m. in London, according to EBS, an electronic foreign-exchange dealing system, from $1.1870 late yesterday in New York. It earlier traded as high as $1.1814. The dollar was at 109.18 yen from 108.78.
The dollar rose to its highest this year against the pound, after minutes from the Bank of England's policy meeting earlier this month showed policy makers voted 8-1 against raising its benchmark interest rate. The bank cited a strengthening in the pound since February in leaving the rate at 4 percent on April 8. Of 16 major currencies tracked by Bloomberg, the U.S. currency is up against all but one before Greenspan's testimony.
`Disturbing'
``Today's statement will go much more into the economic detail,'' said Hans Guenter Redeker, head of foreign exchange strategy at BNP Paribas SA in London. ``Yesterday there was a blunt message that interest rates may have to rise and today I guess it will be much more about the timing.'' The European Central Bank's key interest rate is 2 percent, twice the Fed's overnight lending rate. Speculation the ECB will cut rates and the Fed will raise them is giving investors more reasons to hold dollars. Greenspan yesterday told a Senate panel that companies' ability to raise prices ``is gradually being restored.'' Dallas Fed President Robert McTeer yesterday called March's rise in U.S. consumer prices ``disturbing.''
``If Greenspan is saying the fear of an unwelcome drop in inflation has gone, you can't justify rates at an emergency low level,'' said Mark Austin, head of currency strategy in London at HSBC Holdings Plc. Today, ``he's unlikely to back away from this guidance that rates are going to rise. We could see a period of firm dollar performance.''
`More Upbeat'
``Greenspan was more upbeat on the economy than anyone thought,'' boosting the dollar, said Shimpei Uike, who invests in overseas debt in Tokyo for Asahi Life Asset Management Co., which manages the equivalent of $10.5 billion. ``The likelihood is increasing the Fed will raise rates as early as August.'' Uike said he's considering raising his holdings of dollar- denominated debt above the level recommended by the benchmark his fund tracks. The dollar may strengthen beyond $1.16 against the euro in a month, he said. U.S. Treasuries fell yesterday, with the yield on the benchmark two-year note, among the securities most sensitive to changes in the Fed's interest rate, climbing to the highest since December 2002.
The 1 1/2 percent note due in March 2006 was at 98 23/32, with a yield of 2.16 percent in London trading, according to Cantor Fitzgerald LP.
Futures Trading
Interest-rate futures suggest that traders increased bets the central bank will raise its rate target as soon as September. The yield on the September Eurodollar futures contract rose 9 basis points to 1.67 percent in Singapore trading from 1.58 percent yesterday. The yield is a gauge of a three-month lending rate that has averaged 22 basis points more than the Fed's target over the past 10 years. The dollar's rise may be limited by speculation Greenspan will temper his comments when he speaks today after the reaction to his speech yesterday. ``It's kind of tricky,'' said Richard Yetsenga, currency strategist in Sydney at Deutsche Bank AG. ``If he's worried about the market reaction to what he said the first time, he may massage his message to make sure the market doesn't get too panicky.''
The dollar's advance may accelerate should it breach $1.1800 per euro, a level where automatic orders to buy have been placed, according to Tsutomu Soma, a trader of currencies and derivatives in Tokyo at Okasan Securities Co. Traders typically place these orders to stop losses in the event their bets go the wrong way. ///www.bloomberg.com