24 November 2005, 13:57  Dollar rally fizzles

The dollar’s rally stumbled after minutes released by theFederal Reserve gave investors reason to believe the central bank may be close to ending its cycle of interest-rate hikes. The euro reversed course and rose to 1.1814 dollars at 2200 GMT from 1.1726 dollars late on Monday in New York. The dollar meanwhile swung lower to 118.72 yen from 119.01 yen on Monday. The November 1 minutes from the Federal Open Market Committee surprised the currency markets, which had been pricing in a steady pace of rate hikes from the US central bank. This caused the dollar to reverse course against its main rivals. “The dollar is rolling over and as always, it is the Fed’s fault,” said Kathy Lien at Forex Capital Markets. Lien said the euro “is turning as we are seeing signs of a true bottom,” as the market weighs the latest hints about rate hikes from the European Central Bank and the new information from the Fed. David Resler, chief economist at Nomura Securities, said the Fed appeared to be sending a signal that interest rates are coming into the “neutral” zone after a long period of “accommodation,” to stimulate the economy. “The challenge for the FOMC, however, has been to communicate to the markets that policy has moved close to neutral before it completes the task or without allowing for the possibility that it might be appropriate to move beyond ‘neutral,’” Resler said. “The minutes of the November 1 FOMC meeting appear to be the vehicle the FOMC has chosen to signal that policy has moved into the neutral zone.” Markets were caught by surprise when ECB chief Jean-Claude Trichet had hinted on Friday at a rate rise on December 1. The ECB has held its key lending rate at 2.00 percent since June 2003 and has not raised the cost of borrowing in more than five years. By contrast, the US Federal Reserve earlier this month increased its benchmark rate to 4.00 percent, after a 12th consecutive quarter-point hike. Lien said the Fed may not make an abrupt shift but may be preparing the markets for a change in tone. “We do not expect these debates to deter the Fed from raising rates in December and January, but we do expect changes to the FOMC statement that will make it much more neutral,” she said. In late New York trade, the dollar stood at 1.3105 Swiss francs from 1.3198 Monday. The pound was being traded at 1.7222 dollars from 1.7157 late on Monday.

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