Business

Mon Jun 23 23:49:51 PDT 2008

* Dollar hovers in narrow ranges as Fed meeting awaited

* Traders wary of hawkish Fed statement

* Euro zone data eyed for clues on ECB policy

By Chikako Mogi

TOKYO, June 24 (Reuters) – The dollar rose against the yen and the euro on Tuesday as market players awaited a Federal Reserve statement that could shed light on the timing of an interest rate hike and looked to more euro zone data for clues about the health of the European economy.

After last week’s selling on renewed concerns about the U.S. economy, the dollar may be supported as traders adjust positions before the Fed meeting kicks off later in the day, though the currency lacks strength beyond such technical buying, said Hiroshi Yoshida, a trader at Shinkin Central Bank.

"I don’t expect big moves today due to caution before the Fed meeting," he said.

"There is wariness about the risk of a hawkish Fed statement that could fuel speculation for a rate hike in August, which is not yet fully priced in the market. At the same time, the dollar lacks a reason to build on gains."

Some traders cited quarter-end funding needs as a factor behind the dollar’s firmness, exposing the currency to the risk of a fall once such moves are finished.

"Those short of dollars are scrambling to raise funds by any means in any currencies, particularly ahead of the June quarter end," said a senior dealer at a Japanese trading firm.

"Dollar short funding is likely to intensify as investors seek to build a fat buffer as liquidity dries up in the summer, opening the risk for a sharp dollar drop once the quarterly funding is complete," he said.

The dollar was up 0.2 percent from late U.S. trading on Monday at 108.05 yen off a four-month high of 108.59 yen hit last week.

The euro was down 0.1 percent on the day at $1.5505 but recovering from a drop below $1.55. The euro fell on Monday after data showed German business sentiment and the euro zone’s manufacturing and service sectors contracted in June, denting expectations for a rate hike by the European Central Bank.

The euro/dollar was underpinned by the euro/yen, which inched up 0.2 percent to 167.60 yen near a session peak of around 167.70 yen.

European data due later in the day include the French business climate for June, French consumer spending for May and the German GfK index of consumer sentiment for July.

Traders said weak readings for these data could push the single currency lower against the dollar.

The ECB has signaled a quarter-percentage point rate rise to 4.25 percent in July but officials have stressed this would not necessarily lead to a series of hikes.

The Fed is expected to keep rates at 2 percent on Wednesday when it concludes a two-day meeting. The futures market has priced in a pair of rate hikes by year-end due to surging energy and food price inflation.

Some analysts were skeptical that the Fed’s post-meeting statement would signal a near-term rate hike.

"I doubt if the Fed’s statement will highlight more the inflation risks to suggest a near-term rate increase," said Masafumi Yamamoto, head of foreign exchange strategy for Japan at the Royal Bank of Scotland.

"The dollar may face selling once the market recognises that," he said.

(Editing by Brent Kininmont)

Provided by Reuters

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