10 May 2006, 13:17  Dollar at new yr-lows vs euro ahead of FOMC decision, US currency report

The dollar fell to fresh year lows against the euro and near eight-month lows against the yen ahead of tonight's two key events - the Federal Reserve interest rate decision and the US Treasury's report on currency practices. Although the Federal Reserve is fully expected to hike US interest rates by 25 basis points to 5.00 pct, attention will focus squarely on the accompanying statement. Given Fed chairman Ben Bernanke's recent comments that the rate-setting Federal Reserve Open Market Committee "may decide to take no action at one or more meetings", the market is waiting to see whether the committee confirms that there may be a pause in US rate hikes. Equally, however, it may have become more concerned about inflation given the recent surge in commodity prices. Talk of a possible "pause", and of further pressure from the US for Asian currencies to be allowed to appreciate, has propelled the euro to fresh year-highs against the dollar of 1.1805 usd and caused the US currency to fall to near eight-month lows against the yen of 110.65. Although most analysts feel the US will not go quite as far as to label China a currency manipulator, tonight's US Treasury report is likely to maintain the pressure on China and other Asian countries to allow their currencies to strengthen further, thus keeping the dollar on the backfoot. "Strong language (in the report), taken together with an FOMC statement which is likely to validate expectations of a pause in US interest rates will likely leave the dollar under pressure today," said Mitul Kotecha at CALYON. Meanwhile, the pound also rose to fresh year highs against the dollar and remained firm against the euro after reaching 6-week highs yesterday, ahead of this morning's crucial Bank of England Inflation Report. Market players are hopeful of a hawkish tone to the report which will confirm growing expectations for an interest rate hike in the UK later this year in light of recent strong economic data

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