LONDON, Aug 8: The dollar rose against the euro, yen and Swiss franc on Thursday, stopping short of recent one-month highs as the market took stock of the greenback’s latest rally ahead of a US rate meeting next week.
Although the Federal Reserve is generally expected to keep interest rates steady at 1.75 per cent next Tuesday, there is some talk that it may cut them by at least 25 basis points.
The dollar was also being supported by futures markets pointing to another strong showing on Wall Street after the Dow Jones Industrial Average gained 2.2 per cent on Wednesday.
The dollar resumed its upward march. Stock futures are up. Equity markets are beginning to think we may have had all the bad news, said Neil Parker, market strategist at RBS Financial Markets.
The euro was quoted at US$0.9686 compared with US$0.9740 in late US trade. The single European currency fell to a six-week low of around US$0.9620 on Tuesday.
The dollar traded at 120.61 yen against 120.25 in late US trade and compared with a six-week high of 121.23 hit on Tuesday. Against the Swiss franc it was up nearly one per cent at 1.5093 francs.
News overnight that the International Monetary Fund was extending a cash lifeline of $30 billion to Brazil to shore up its economy and quieten pre-election tension among investors had little impact on the major currency pairs.
A Reuters poll found that seven of 21 US primary dealers now see the Federal Reserve shifting its assessment of risk to “weakness” from “balanced” when policy-makers meet, up from three in the previous poll on August 2.
While a cut in the 1.75 per cent fed funds rate is not ruled out, few expect a move quite so soon. In any case, the market is questioning whether a rate cut would help or hinder the greenback.
The dollar could benefit if equity markets respond positively to a Fed rate cut, but if the market senses panic it could accelerate the dollar’s downtrend, said Shahab Jalinoos, currency strategist at UBS Warburg.
Substantial rate cuts last year have done little to turn the economy around and the market may start to worry about a Japan-style lack of response to monetary stimulus.
Neil MacKinnon, chief economist at currency debt management group ECU, noted Fed rate cuts last year were seen as dollar positive but also questioned whether the response would be the same this time around.
The market is sensitive to the fact that the Fed is running out of ammunition, he said.
Dealers noted the dollar’s failure to capitalise much on gains of around two per cent on Wall Street on Wednesday, with some saying the dollar-equity link appeared to have slackened off a bit for now. Nevertheless, US stock futures were indicating a mildly firmer start.—Reuters