The dollar gained for a fourth day against the yen in London on expectations the Federal Reserve will raise borrowing costs today for the first time since 2000 and signal it is ready to increase rates further this year. Forecasts the Fed will lift its target rate from 1 percent are helping the U.S. currency to the first quarterly gain in a year versus the yen and the only back-to-back three-month rise against the euro since 2002. Consumer confidence in the U.S. rose to a two-year high in June, a report yesterday showed. Betting against the dollar ``is no longer a comfortable position to be in, it's a position that has failed,'' said Steve Pearson, a currency strategist at HBOS Plc in London. ``People are now starting to unwind those positions'' before the Fed decision. Against the yen, the dollar rose to 108.74 at 9:18 a.m. in London from 108.22 late yesterday in New York, according to EBS, an electronic foreign-exchange dealing system. Versus the euro, the dollar was at $1.2106 from $1.2082 after gaining the most in two weeks yesterday after the consumer confidence report.
``People don't want to be too short on the dollar in the run- up to the Fed decision because you may be caught off-guard by any hint of a more aggressive tightening,'' said Takako Masai, a director of currency sales at Calyon, the investment-banking unit of Credit Agricole SA in Tokyo.
Waning Yen Demand
Some traders also sold the yen on concern the currency's 0.7 percent appreciation this month already reflects Japan's longest period of economic growth in seven years, said Steven Saywell, a currency strategist at Citigroup Inc. in London. Factories raised production last month at a slower pace than expected. ``Dollar-yen is very sensitive to the economic outlook in Japan,'' said Saywell. ``Industrial production yesterday was very weak and that continues to weigh on the yen.'' The dollar also gained versus British pound as well as the currencies of Australia, Canada, South Africa and New Zealand. Twenty-two of Wall Street's 23 largest bond trading firms polled yesterday by Bloomberg News expect the Fed to lift its target rate by a quarter-point and keep to a commitment to a ``measured'' pace of rate increases to fight inflation. ``The risk is for the Fed omitting the phrase `measured' from its statement,'' said Mitsuru Sahara, vice president of foreign-exchange trading at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``That would cause a rally in the dollar.'' Today's expected increase would be the first in four years and the central bank's first step toward a more ``neutral'' federal funds rate, or one that's intended to neither speed nor slow the economy.
`Slight Negative'
Citigroup is among the so-called U.S. primary dealers predicting the Fed will raise its rate by a quarter point and will retain the word `measured.' The absence of any hint of faster increases may push the dollar lower, Saywell said. ``There will be no new surprises today,'' he said. ``That will be a slight negative for the dollar.'' The yen has shed 4.2 percent against the dollar so far this quarter and has declined for four consecutive days. Its drop may be limited by forecasts the central bank's survey of business confidence tomorrow will show large manufacturers are the most optimistic in more than a decade. Japan's currency will strengthen to 105.72 at year-end, a level not seen since April, according to the average of 50 forecasts from traders and strategists polled by Bloomberg News between June 21 and June 29. The Bank of Japan's Tankan index for large manufacturers probably rose to 17 this quarter, the highest since Japan's asset bubble burst in 1991, according to the median of 45 forecasts in a Bloomberg News survey.
`Gained Momentum'
Japan's economy may be moving toward consumer-led growth, said Hideo Hayakawa, director-general at the Bank of Japan's research and statistics department. ``Consumer spending has gained momentum more than we had expected,'' Hayakawa said. He spoke in Tokyo in an interview. ``We may see the upside surprise on the Tankan survey,'' said Claudio Piron, a currency strategist in Singapore at Standard Chartered Plc. ``That should also help support the yen.'' Against the euro, the dollar will weaken to $1.22 by year- end, according to the survey published today. The U.S. currency is 2 percent higher since March 31 as Fed policy makers signaled they're ready to raise rates following the addition of 1.2 million jobs in five months and 11 straight quarters of economic growth.
In the euro region, economies such as Germany and Italy are still struggling to expand. A European Union report today may show inflation in the dozen euro nations slowed in June, giving the European Central Bank leeway to keep its benchmark rate at 2 percent as an economic recovery gathers pace. Consumer prices may have risen 2.4 percent from a year ago after gaining 2.5 percent in May, the median forecast of 35 economists surveyed by Bloomberg News showed. The EU's statistics office will publish the figure at 11 a.m. in Brussels. ////www.bloomberg.com