25 May 2006, 10:22  Dollar keeps gains on Fed rate hopes

The dollar steadied on Thursday after recovering against the euro and the yen the previous session on upbeat housing data that tilted expectations toward the Federal Reserve raising interest rates in June. The unexpected 4.9 percent gain in April new home sales helped soothe worries about a sharp slowdown in the once red-hot property market and suggested the Fed may lift its funds rate for a 17th straight time to 5.25 percent at its next meeting. Another increase would help the dollar maintain its yield advantage over the euro and yen, even as the European Central Bank is poised to press ahead with more rate rises and the Bank of Japan prepares to start doing so soon. The dollar has been battered by speculation Washington wants a weaker currency to help shrink the giant U.S. trade deficit, especially after the Group of Seven powers explicitly called last month for emerging Asian countries to allow currency strength. But after tumbling to one-year lows against the euro and the pound and an eight-month trough versus the yen, the dollar has bounced back as investors have cut their big bets against the U.S. currency as volatility has spiked up across asset markets. Sharada Selvanathan, currency strategist at BNP Paribas in Singapore, said the dollar's inability to gain much more was disappointing and the currency was likely poised to resume its downtrend once markets settle down. "The price action over the past week shows the market is not keen to go long the dollar," she said. Currency strategists at Morgan Stanley noted that big funds shifting positions were likely more to blame for the swings in currencies since even the safe-haven Swiss franc has tumbled against the dollar in the past few sessions. "Fundamentals have not been the key driver of recent dynamics in FX," they said. Markets remain turbulent. The Nikkei share average <.N225> was down over 1 percent on Thursday afternoon, just a day after surging 2 percent higher from a three-month low.

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