11 June 2004, 12:05  Dollar Strengthens After Fed's Poole Suggests Faster Rate Rises

The dollar surged in London, heading for the biggest weekly advance against the euro in five months, after Federal Reserve member William Poole said the central bank may raise its target interest rate faster than investors expect. The Fed is prepared to increase its benchmark rate from 1 percent further and more rapidly than some analysts predict if inflation risks intensify, Poole, president of the St. Louis Fed, said in an interview with . Poole's spokesman, Joe Elstner, confirmed the comments and said the bank president is not immediately available because he is traveling. ``Comments from the Fed suggest they are wary of a pick-up in inflation -- investors are taking that to mean interest rates are set to rise more than expected,'' said Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc. ``The dollar has continued to benefit from that.''
Against the euro, the dollar rose to $1.1976 at 8:38 a.m. in London, from $1.2106 late in New York yesterday, according to EBS, an electronic foreign-exchange dealing system. It also gained to 110.24 yen, from 109.34. The dollar is up 2.4 percent compared with the euro so far this week and down 0.8 percent versus the Japanese currency. The dollar may advance to $1.18 per euro in a month, Robson said. Poole is a voting member of the Fed's Open Market Committee, which sets the key interest rate target and will next meet June 29- 30. The Fed's benchmark rate is at a 46-year low of 1 percent, half that of the European Central Bank. The Fed last lowered its rate in June last year and hasn't increased it since 2000.
`Further and Faster'
Fed policy makers will at least double their target rate for overnight loans between banks by year-end, a majority of economists at Wall Street's largest bond-trading firms said in a Bloomberg survey published yesterday. The FOMC may need ``to move further and faster than priced-in in the market,'' should there be signs of inflation picking up, Poole said, according to . Fed Chairman Alan Greenspan said Tuesday he will ``do what is required'' to stem inflation. ``Expectations of faster monetary tightening are supporting the dollar,'' said Harvinder Kalirai, head of market research in Sydney at State Street Corp., the world's largest custodian of assets. ``There's certainly common ground among Fed officials.'' U.S. stock and bond markets are closed today for former President Ronald Reagan's funeral in Washington. Two more Fed officials, presidents Jack Guynn of Atlanta and Sandra Pianalto of Cleveland, are scheduled to speak about the economy today.
Japanese Economy
The dollar's gain against the yen accelerated after it breached 109.50-60, a level where automatic orders to sell the yen had been placed, said Akira Gomikawa, vice president of the foreign exchange division in Tokyo at Mizuho Corporate Bank Ltd. The yen was still headed for its third weekly gain in four against the dollar on expectations Japan's economic recovery is accelerating, luring investors into the country's assets.
Japan's industrial production rose a revised 3.5 percent, up from a previous estimate of 3.3 percent, the government said. Machinery orders in April had their biggest gain in six months, a report yesterday showed, a day after the government boosted its estimate for first quarter growth. Ten-year government bond yields have more than quadrupled from a record low in the past year and the Nikkei 225 Stock Average rose to a six-week high yesterday. The Nikkei fell 0.4 percent today.
Demand for Yen
``Yen buying has picked up,'' said Toru Umemoto, market analyst in Tokyo at Keio University's Global Security Research Center, which is headed by Eisuke Sakakibara, former vice finance minister for international affairs. ``The economic data have been very good. As international investors come back into the Nikkei, the yen could rise even further.'' The yen was at 132.17 per euro, from 132.28. The Japanese currency was up 1.4 percent on the week against the dollar and 3.3 percent against the euro, its biggest gain in six months.
Japan's currency will gain as rising yields on bonds entice domestic investors to keep money in the country, said Citigroup Inc., Deutsche Bank AG and Barclays Capital Inc., three of the top 10 currency-trading firms. The yen may reach 108 per dollar in three months, 104 in six months and 102 in 12 months, said Robert Sinche, head of currency strategy at Citigroup, the third-largest currency trader in a Euromoney magazine survey.
`Slow Things Down'
The addition of 1.2 million U.S. jobs this year, at a monthly average of 316,000 since March, has some economists doubting the central bank can keep its May 4 pledge to raise interest rates at a ``measured'' pace without risking faster inflation. ``You're going to see `measured' disappear from their rhetoric within the next few months,'' said Larry Kantor, head of economics and market strategy in New York at Barclays Capital and a former Fed economist. ``The Fed actually needs to slow things down.'' Economists at 10 of the 23 primary U.S. government securities dealers that trade with the Fed's New York branch said the so- called federal funds rate will be 2 percent by year-end, according to a Bloomberg News survey. Barclays and J.P. Morgan Chase & Co. are among four firms saying it will be 2.25 percent. Barclays forecasts a quarter-percentage point increase this month and half- point boosts in August and November. ///www.bloomberg.com

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