The dollar rose against the euro in London on speculation a government report tomorrow will show U.S. inflation and growth accelerated in the first quarter, adding to the case for the Federal Reserve to raise rates by September. Tomorrow's report on U.S. gross domestic product is expected to show a measure of inflation in the economy rose to 2 percent from 1.5 percent in the fourth quarter, according to the median of 74 forecasts in a Bloomberg News survey. The Fed has kept its benchmark rate at an almost 46-year low of 1 percent since June, citing ``muted'' price increases. ``There's no doubt that if we get positive growth numbers and a hike in the deflator, investors will keep factoring in higher rates,'' which will boost the dollar to $1.1750 in the next few days, said Armin Mekelburg, a currency strategist in Munich at HVB Group, Germany's second- biggest bank.
Against the euro, the dollar rose for the first day in three to $1.1914 by 9:07 a.m. in London compared with $1.1930 late yesterday in New York, according to EBS, an electronic foreign- exchange dealing system. The dollar also traded at 109.02 yen from 109.42 yesterday. Growth in the world's largest economy quickened to 5 percent at an annual rate from a 4.1 percent pace in the fourth quarter, tomorrow's GDP report may show. The so-called GDP price deflator is a measure of prices across the economy. Last week, Fed policy makers said deflation is no longer an issue in the U.S., while a period of slowing inflation has ended, suggesting the central bank is moving closer to raising the federal funds rate. Fed Vice Chairman Roger Ferguson said Friday ``the process of disinflation appears to have ceased,'' in a speech in Washington.
``The market is expecting a ramp up from the Fed for a rate hike, and that supports the dollar,'' said Thomas O'Malley, head of global currency portfolio management in San Francisco at Barclays Global Investors, which oversees more than $1 trillion.
Yield Gap
The euro has dropped 3.9 percent since a government report on April 2 showed that U.S. employers boosted payrolls by the most in almost four years last month. Demand for the dollar had waned for two years, as U.S. benchmark rates and bond yields fell below those in the 12-nation euro region, lowering the attraction of U.S. assets. On Feb. 18, the euro reached a record $1.2930. A reversal in the yield advantage on some European government securities has helped spark this month's rally in the dollar. The U.S. 10-year Treasury note now yields 0.27 percentage point more than its German equivalent. On April 1, Germany's 10- year note had a 0.4 percentage point advantage. ``The dollar is advancing pretty well and I think that will continue as long as you get this interest rates story developing,'' said Ian Gunner, head of foreign-exchange research in London at Mellon Financial Corp., which manages about $612 billion.
Futures Trading
The rate on the September eurodollar interest rate futures contract has risen 37 basis points in the past month to 1.69 percent, suggesting traders have increased bets that the Fed will raise its target rate by then. The yield is a gauge of a three- month lending rate that has averaged 0.22 percentage point more than the federal funds rate in the past 10 years. Against the dollar, the yen rose earlier after Japan's Ministry of Finance said it is more optimistic on the economy and a government report predicted factory production will increase. ``The Japanese economy overall is recovering,'' MOF regional bureau chiefs said in a quarterly report. The release described local economies as ``recovering'' for the first time since October 2000. Industrial output ``is in a moderate rising trend,'' the Ministry of Economy, Trade and Industry said in lifting its assessment. ``Japan's economic outlook is bullish,'' said Tohru Sasaki, currency strategist in Tokyo at J.P. Morgan Chase & Co. and a former Bank of Japan official. ``That will continue to prompt overseas investors to pour a fair amount of money into Japan.
BOJ
Pre-set orders to buy the yen were triggered when it reached 109.30 to 109.20 per dollar, said Shigehiro Kamimura, manager of the market trading office in Tokyo at Resona Bank Ltd. There are more such orders below 109, he said. Traders sometimes place pre- set orders to stop losses in case their bets go the wrong way. The yen stayed higher after Bank of Japan policy makers projected that consumer prices in the world's second-largest economy will decline for a seventh fiscal year in the year to March 31, 2005. The economy will expand 3.1 percent, the board said in its twice-yearly outlook released in Tokyo. At a board meeting earlier today, the BOJ left interest rates unchanged and kept the upper limit of reserves the bank makes available to lenders at 35 trillion yen ($321 billion). It also maintained monthly purchases of government bonds at 1.2 trillion yen. ///www.bloomberg.com