Dollar is high- on what?

Date:   1/2/2006 11:00:19 AM ( 18 y ago)

By Carolyn Cohn
LONDON (Reuters) - The dollar looked set on Friday to end 2005 up almost 15 percent versus the euro and the yen and to post its best annual gain in eight years against an index of currencies, boosted by the Fed's ongoing rate-raising campaign.

The dollar had a shot in the arm this year from a steady stream of U.S. interest rate rises. The Federal Reserve is expected to raise rates for a 14th straight meeting in January, taking its key rate to 4.5 percent, and more rises are seen possible.

The greenback has rebounded after a three-year, 30 percent decline driven by worries about the United States' ability to finance its growing trade deficit.

"In December 2004, U.S. interest rates were at 2.25 percent and people were expecting them to top out at 3.0 percent -- the Fed hikes this year have been the catalyst for an end to the dollar's bear run," said Kamal Sharma, currency strategist at Bank of America.

The dollar was trading around 117.77 yen at 1240 GMT, steadying from late U.S. levels.

It recovered earlier losses against the yen made on selling by U.S. brokerages in Tokyo ahead of the New Year holidays.

Financial centers in London, New York, Tokyo and Singapore will be shut on Monday and many centers close early on Friday.

The euro dropped to 2-1/2 week lows against the dollar at $1.1791 as U.S. trading got under way, within half a cent of the single currency's 1999 launch levels of $1.1747.

Analysts said there was talk of last-minute repatriation of dollars by U.S. corporates before the year draws to a close.

French unemployment unexpectedly fell in November to 9.6 percent from 9.7 percent in October, according to data released late on Thursday before the official publication time on Friday.

The Swiss franc rose against the dollar and hit one-week highs against the euro after the key Swiss KOF indicator rose to a 5-1/2 year high of 1.36 in December, well above forecast.
DOLLAR IN FRONT

The greenback is on track for its best year since 1997, when the trade-weighted index rose 13 percent. A rise just above that would mark the dollar's best performance since 1984, when it rose 15 percent.

The dollar is also set for its largest rise over the course of a year against the euro since the single currency's launch in 1999.

The dollar last rose around 15 percent against the yen in 2001.

The U.S. is expected to continue raising rates at a sharper pace than the euro zone or Japan next year, keeping the dollar supported in the near term.

Most analysts expect the Bank of Japan to dismantle its ultra-loose monetary policy early in 2006, but euro/yen futures show a quarter-point rate rise by the central bank is still not being priced in until late in the year.

"The focus next year will again be on the Fed -- we expect Fed funds to go up to 5 percent, higher than levels priced into the markets," said Steve Barrow, currency strategist at Bear Stearns.

"The yen may not rise until the Bank of Japan starts raising rates and affects the yen's status as a funding currency."

Some analysts expect the euro to perform better against the dollar in 2006, since one factor weighing it down in 2005 was a one-off tax break to U.S. companies repatriating overseas profits, which expires at the end of December.

And many analysts expect the European Central Bank to raise rates twice in 2006, after a quarter-percentage-point hike in December to 2.25 percent, its first rate rise in five years.

A Reuters poll of over 50 strategists earlier this month saw the euro rising to $1.25 in 12 months' time, and the yen gaining to 108 per dollar.

http://today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2005...




 

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