The dollar fell across the board as investors grew jittery ahead of a U.S. interest rate decision later on Tuesday that market had overdone expectations of aggressive U.S. rate hikes later this year. Most economists expect the U.S. Federal Reserve to leave rates at a 46-year low of one percent in an announcement at 1815 GMT following a policy meeting. However, they think it will indicate higher borrowing costs will soon be needed to curb inflationary pressure in the fast-growing U.S. economy. With the market already pricing in several dollar-supportive U.S. rate hikes before the end of the year, dealers said the risks to the greenback were now on the downside. "People are afraid the dollar could suffer if the Fed does not move to a tightening bias today," said Lee Ferridge, head of global currency strategy at Rabobank.
"The euro's push above $1.20 caught many by surprise and triggered (dollar) sell-stops." The euro rose more than one percent to $1.2071 , its highest in over two weeks, as the dollar crashed through chart levels, falling more than one percent against the British pound and Norwegian crown. The dollar fared better against the yen with Japanese markets closed for the Golden Week holiday. By 1010 GMT, the dollar was just fractionally lower at 110.05 yen .
END TO PATIENCE?
At the end of last month, Fed chairman Alan Greenspan said interest rates would have to rise at some point but he also sounded calm on inflation, suggesting no imminent move. Strong U.S. data in recent weeks, including an improvement in the jobs market in Monday's ISM manufacturing survey, have raised expectations the Fed might change the tone of its statement to prepare for a rate hike. "The market is focused on the language of the Fed. They are warming up the market for a future rate hike, likely to come in August," said Fatih Yilmaz, currency strategist at Bank of America. Much hangs on the next couple of payroll reports which could show whether hiring has picked up to a more robust pace. The April labour report is due on Friday. A rise of more than 170,000 jobs is expected in payrolls, which, coming after March's 308,000 jump, would add to expectations for a U.S. rate rise. The dollar's fall on Tuesday came after supportive news for the U.S. currency on Monday from the U.S. government's budget situation. The U.S. Treasury Department slashed its estimated borrowing for the current quarter in half and said it had borrowed far less than expected in the first three months of 2004.///