2 August 2006, 14:00  Dollar weak as market shrugs off US data

The dollar was weak against major currencies as firm US data yesterday was considered insufficient to edge US rate-setters in favour of raising interest rates on August 8.
Stronger-than-expected US core PCE inflation data and the monthly ISM survey on manufacturing activity allowed a brief dollar rally, which later petered out as the data did not materially change the interest rate outlook.
Sellers then moved back in and the dollar fell to 26-day lows against the euro, which has since settled above the 1.28 usd mark. "The underlying message from recent price action is that strong data that do not durably alter the likely path of monetary policy produce dollar rallies that fail," said Steve Pearson at HBOS.
Meanwhile, the yen rebounded against the dollar after Bank of Japan board member Atsushi Mizuno said a further hike in Japanese interest rates this year cannot be ruled out, warning that negative real interest rates could provoke large economic swings.
Mizuno's comments offset remarks made yesterday by incoming US Treasury Secretary Henry Paulson reiterating the previous strong dollar policy, which had earlier put the yen under pressure. Paulson's comments were interpreted as suggesting that the US may not be in such a hurry to pressure China to allow the yuan to appreciate.
Elsewhere, the Australian dollar was off earlier highs after the Reserve Bank of Australia raised interest rates by 25 basis points to 6.0 pct, their highest level in six years.
The market is now awaiting an expected interest rate hike by the European Central Bank tomorrow, as well as this week's Bank of England rate-setting meeting and Friday's key US monthly jobs data.

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