May 22 (Bloomberg) -- The dollar snapped two days of declines against
the euro, rallying from the lowest level in a month, as traders added
to bets the Federal Reserve will raise interest rates by year-end and
oil retreated.
The U.S. currency also gained versus the yen after minutes of the
Fed's April meeting yesterday showed most policy makers viewed the cut
in the target rate to 2 percent as ``a close call,'' indicating the
central bank has gone on hold to stem inflation. The New Zealand
dollar rose against all of the major currencies after tax cuts reduced
the need to lower rates.
``The Fed is telling us to not think in terms of easing,'' said Alan
Ruskin, head of international currency strategy at RBS Greenwich
Capital Markets in Greenwich, Connecticut. ``That is the most
important feature behind the dollar comeback today.''
The U.S. currency strengthened to $1.5710 per euro as of 12:18 p.m. in
New York, from $1.5795 in New York yesterday. It earlier touched
$1.5814, the lowest level since April 24. The dollar rose to 104.03
yen, from 103.05 yen. The euro traded at 163.43 yen, up from 162.76
yen.
The dollar extended its gains as the price of crude oil fell to
$131.85 after surpassing $135 earlier. A decline in the price of oil
can lighten the financial burden on consumers.
U.S. house prices fell less than expected in the first quarter. The
Office of Federal Housing Enterprise Oversight said its house price
purchase index declined 0.2 percent, after rising 0.3 percent the
previous quarter. The median forecast in a Bloomberg News survey of 13
economists was for a drop of 1.3 percent.
Kiwi Climbs
The New Zealand dollar rose after Finance Minister Michael Cullen cut
taxes, easing pressure on the central bank to lower interest rates to
support the economy. The kiwi, as it is known, climbed to 78.96 U.S.
cents, the highest level since May 7, before trading at 78.46 cents,
from 77.70 yesterday.
The Australian dollar yesterday touched the highest since being
allowed to trade freely in 1983 as investors sought the nation's
higher-yielding debt. The currency, which climbed to as high as 96.54
U.S. cents yesterday, was at 95.51 cents today, from 96.25. The Aussie
has risen about 10 percent this year, the second-biggest gain among
the 16 most-traded currencies.
The Aussie will climb to equal value with the U.S. currency for the
first time since 1982 as the central bank considers raising interest
rates, say banks that include RBC Capital Markets Inc. and ABN Amro
Holding NV.
Interest-Rate Bets
Futures on the Chicago Board of Trade show traders see a 92 percent
likelihood the Fed will keep its target rate for overnight lending
between banks at 2 percent on June 25, up from odds of 88 percent
yesterday. Traders also see a 32 percent probability the Fed will lift
the rate in September to 2.25 percent, up from a 21 percent chance
yesterday.
``The Fed has a more balanced view on inflation and growth,'' said
Matthew Strauss, a senior currency strategist at RBC Capital Markets
in Toronto, a unit of Canada's biggest bank by assets. The dollar
decline has ``lost momentum.''
The dollar has fallen 2 percent against the euro since May 8, after
European Central Bank President Jean-Claude Trichet said inflation
remains the bank's top priority. That signaled policy makers won't cut
the 4 percent benchmark interest rate soon.
The dollar advanced to $1.9786 against the British pound, from
$1.9732, and was at 1.0324 versus the Swiss franc, from 1.0250.
The Dollar Index traded on ICE futures in New York, which tracks the
dollar against currencies of six trading partners, rose to 72.231,
from 71.938 yesterday.
Downgraded Estimate
Gains for the dollar may be limited as the market starts to focus on
the Fed's downgrade of its 2008 economic growth estimate, which
accompanied the minutes yesterday, wrote Derek Halpenny, head of
currency research at Bank of Tokyo-Mitsubishi in London, in a note to
clients today.
The central bank cut its growth projections to a range of 0.3 percent
to 1.2 percent from its January forecast of 1.3 percent to 2 percent.
The Fed's interest-rate reductions this year, a total of 2.25
percentage points, were the most aggressive in almost two decades.
``We expect the dollar to remain under selling pressure as market
participants' optimism over a notable upturn in economic activity
gradually fades,'' Halpenny wrote.
The euro climbed versus the dollar yesterday after German business
confidence unexpectedly rose, bolstering speculation the ECB won't cut
interest rates. Germany is the biggest economy in the euro region.
Charts
The European single currency may rise to $1.5850 against the dollar in
one week, based on charts used to predict price movements, said
Masashi Hashimoto, a senior currency analyst at Bank of
Tokyo-Mitsubishi UFJ Ltd.
The currency has held above so-called support at the five- and 21-day
moving averages of $1.5663 and $1.5553, respectively, signaling
further gains in the near term, Tokyo-based Hashimoto said. Support is
where buyers are expected to outweigh sellers.
Buoyed by gains in the Standard & Poor's 500 Index, the yen fell 2.2
percent against the New Zealand dollar and 1.8 percent against the
South African rand. The two currencies are popular in the so-called
carry trade in which investors borrow money cheaply to invest in
assets where rates are higher.
The Japanese borrowing cost of 0.5 percent compares with 11.5 percent
in South Africa and 8.25 percent in New Zealand. The allure of the
trade falls when currency volatility rises as it jeopardizes returns
on the interest rate spread. The S&P rose 0.1 percent after two days
of decline.