Dollar regains some ground amid policy speculation

16:08, October 10, 2009      

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The U.S. dollar regained some ground at the end of a brutal week, while currency trading was driven by speculations on possible changes to major economies' monetary policies.

The U.S. Federal Reserve, the European Central Bank (ECB) and other major central banks have been maintaining their benchmark interest rates at ultra low levels for months. However, a surprise rate hike from Australia's central bank sparked speculation that tighter policies may be on the way around the world.

The Reserve Bank of Australia (RBA) on Tuesday raised its cash rate by 25 basis points to 3.25 percent. It was the first rate hike by the central bank in 19 months and surprised most analysts, who had forecast rates would be left unchanged till November.

Since the economic crisis began, RBA has cut rates six times in a row, to a 49-year low level of three percent, where it had remained for five months until Tuesday's increase.

RBA governor Glenn Stevens said in a statement economic conditions in Australia had been better than expected and confidence had recovered.

It was now prudent to begin gradually lessening the stimulus measures provided by monetary policy, he said.

The rate hike made Australia the first G20 country to withdraw monetary stimulus by raising rates. Analysts expect that central banks of some major countries may follow soon, but not the U.S. Federal Reserve.

Deutsche Bank cut its forecast for dollar-euro exchange rates on Wednesday on the basis that the U.S. Federal Reserve is expected to keep rates lower than other nations. The dollar will trade at 1.40 dollars per euro by the end of next year, after weakening to 1.55 dollars per euro in the first quarter, according to the world's biggest currency trader.

The dollar fell against most major currencies in most sessions of the past week as investors turned to riskier assets, with the dollar index hitting a weekly low of 76.025 on Thursday, compared to 76.668 on Monday.

The index, which measures the dollar against a basket of major currencies, climbed to 76.35 on Friday amid comments from U.S. Federal Reserve Chairman Ben Bernanke.

"When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy," Bernanke said late on Thursday after a Fed meeting.

He said policymakers at the central bank believed that accommodative policies would likely be warranted for "an extended period".

"At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road," Bernanke said. The mildly hawkish tone of his comments drove the dollar higher in Friday trading.

The ECB and the Bank of England (BoE) decided to leave their benchmark interest rates unchanged at their regular policy meetings Thursday. The ECB kept its key rate at 1 percent while the BoE left its key rate at 0.5 percent, both historically low levels. Neither of the central banks made major changes to their fiscal and monetary stimulus policies, in line with expectations.

The eurozone economy was stabilizing and was expected to recover at a gradual pace, the ECB President Jean-Claude Trichet said after the meeting, but he warned that uncertainty remained high and the recovery was expected to remain rather uneven.

The ECB appeared to be in no hurry to tighten policy, analysts said, expecting the bank to keep its rate at 1 percent well into 2010.

New economic data released in the week provided further evidence that the U.S. economy was pulling out of recession, though the pace of recovery remains gradual. Rising unemployment could undermine the expected recovery in housing and consumer spending.

Analysts are split on the near-term future of the dollar. Some say the greenback has been technically oversold, while others expect the U.S. currency will keep devaluing.

Investors are looking for trading clues from some key U.S. economic reports due next week, including retail sales, consumer prices, industrial production and consumer sentiment.

The euro bought 1.4709 dollars in late Friday New York trading, about 0.8 percent higher than a week ago. The British pound fell 0.5 percent to 1.5835 dollars.

The dollar fell by 3.5 percent during the past week to 1.0441 Canadian dollars, and fell 0.2 percent to 1.0322 Swiss francs. Butit rose 0.2 percent to 89.84 Japanese yen.

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