26 April 2004, 09:32  Dollar Rises to Highest in Five Months Against Euro in Asia

The dollar rose to a five-month high against the euro in Asia on speculation a report this week will show U.S. growth is accelerating, increasing chances the Federal Reserve will raise interest rates by September. A report this week may show the U.S. economy expanded at a 5 percent annual rate in the first quarter from 4.1 percent the previous three months. The International Monetary Fund last week forecast 2004 growth for the euro region at 1.7 percent. The dollar last week had its biggest gain in a month as Fed officials suggested they are closer to raising their key rate from a 45-year low of 1 percent.
``We'll be seeing a Fed rate hike, and it could come as soon as August,'' said David Mann, currency strategist in Singapore at Standard Chartered Plc. U.S. economic reports are ``very much in favor of the dollar.'' Against the euro, the dollar rose to $1.1788 at 1:33 p.m. in Tokyo, according to EBS, an electronic foreign-exchange dealing system, from $1.1842 late Friday in New York. Earlier it reached $1.1761, its highest since Nov. 25. The dollar also bought 108.98 yen, from 108.97 yen. The dollar may rise as high as $1.1660 per euro in the next several days, Mann said. Standard Chartered shared the top spot as the most accurate predictor of the euro-dollar exchange rate last quarter, according to a Bloomberg News survey of 54 companies.
Treasuries Attract
Rising Treasury yields may help attract some of the capital needed to help the dollar advance. At 4.48 percent, the benchmark U.S. 10-year note yields 0.30 percentage point more than its German equivalent, compared with yielding 0.08 percentage point less on April 1. Japanese 10-year government bonds yield about 1.5 percent. If Japanese bond yields stay at their current level ``it's worth investing in U.S. bonds,'' said Ryu Hihara, deputy general manager in the finance and investment planning department at Nippon Life Insurance Co., Japan's largest life insurer by assets. September Eurodollar interest-rate futures yielded 1.73 percent in Singapore trading, up 0.095 percentage point, as traders raised bets for a Fed rate increase by September. The yield is a gauge of a three-month lending rate that has averaged about 0.22 percentage point more than the Fed's target over the past 10 years. The yield rose from 1.535 percent a week earlier.
Trichet Pressured
The euro extended its decline against the dollar after a European official said French Finance Minister Nicolas Sarkozy and his German counterpart, Hans Eichel, clashed with European Central Bank President Jean-Claude Trichet over interest rates at the Group of Seven meeting on Saturday. The two ministers pressured Trichet to lower interest rates at the gathering of the finance ministers and central bankers, which was held alongside meetings of the International Monetary Fund and World Bank in Washington, said the official, who spoke on condition of anonymity. ``Clearly there's debate over the issue of a rate cut,'' said Craig Ferguson, currency analyst in Melbourne at Australia and New Zealand Banking Group. The report ``is enough to move the market and send the euro down a bit more.'' The euro may fall to $1.1750 today, he said. The 12-nation European common currency dropped to 128.38 yen, from 129.04 yen.
Trichet will speak in New York on Monday at a luncheon address to the Economics Club of New York.
G-7 Redux
Finance ministers from the G-7 industrialized nations meeting in Washington on Saturday and Sunday reiterated their stance on foreign exchange policy. ``Excess volatility and disorderly movements in exchange rates are undesirable for economic growth,'' the statement said, repeating language from its February meeting. ``We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility.'' Forty-three percent of the 60 investors, traders and strategists polled Friday from Tokyo to New York advised selling the euro against the dollar this week. About 44 percent made the same recommendation the week before. Twenty-nine percent said to sell the yen against the dollar. Gross domestic product, the sum of all goods and services produced in the U.S., rose 5 percent in the first three months of the year, according to the median forecast of 68 economists surveyed by Bloomberg. The report is due Thursday.
U.S. Reports
Consumer confidence probably increased and a gauge of manufacturing in the Chicago area advanced in April, separate reports this week are expected to show. Both reports are scheduled to be released Thursday as well. ``The dollar's direction is up,'' said Jake Moore, currency strategist in Tokyo at Barclays Capital Inc. ``Interest rates are headed higher and the economy is doing well.''
Barclays on Friday raised its six-month forecast for the dollar to $1.10 per euro from $1.22, citing a jump of 308,000 in March employment figures and suggestions from Fed chief Alan Greenspan and other officials that rates are set to rise. Commerce Department figures on Friday showed durable goods orders surged 3.4 percent in March, almost five times the 0.7 percent gain economists had forecast in a Bloomberg News survey. In other trading, the dollar rose to 1.3210 Swiss francs, from 1.3148 francs. The British pound was at $1.7716, from $1.7713. ///www.bloomberg.com

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