Dollar Falls on Rebounding Oil, Inflation

Friday, June 20, 2008 10:59 AM

NEW YORK -- The dollar fell broadly Friday, dragged down by a surge in oil prices and more tough inflation comments from a European Central Bank official that raised the specter of rate hikes in the euro zone beyond July.

ECB Executive Board member Lorenzo Bini Smaghi, writing in a column for the Financial Times published Friday, said the central bank will have to raise interest rates unless the euro zone services sector improved its productivity to counter higher commodity prices.

At the same time, German producer price inflation rose at a much faster-than-expected pace in May to its highest level since July, fanned by surging energy costs.

"That's pushing the euro up. With the ECB forever concerned about inflation and the inflation data out of Europe coming in stronger than expectations, that's going to keep the focus on rate hike expectations in the euro zone," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida.

"ECB council members have been very clear that we are not expecting a series of rates hikes, but on the other hand it's to be dependent on incoming data. If we keep seeing numbers like this, at some point the market will begin to price in more than one rate hike by the bank."

The ECB has already flagged an interest rate hike for July, which could further widen the euro's yield advantage against the dollar.

The New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of six currencies, dropped to a 10-day low at 73.003 and was poised for its largest weekly loss since March 30.

The euro rose 0.7 percent to $1.5606, after climbing to a session high of $1.5624 in overnight trade.

OIL REBOUNDS

Oil rose above $133 a barrel, rebounding from Thursday's sharp sell-off after China's move to raise fuel prices. Analysts said the thinking in the market was that China's fuel price increase may actually boost demand.

The dollar has tended to fall when oil prices surge due to speculation that oil-producing countries may use the increased dollar-denominated windfall from crude exports to buy euros and other currencies to diversify their portfolios.

"There is a broad-based dollar weakness on a perception perhaps, that oil will stay very high for at least a little while," said Stephen Koukoulas, global strategist at TD Securities in London.

Moody's Investor Service's downgrading of the insurance arms of Ambac Financial Group and MBIA Inc late Thursday also added to selling pressure on the U.S. currency. The downgrades highlighted continuing jitters over the credit crunch.

Investment bank Citigroup also warned late on Thursday that it could take substantial write-downs in the second quarter.

Those concerns about the health of the U.S. financial sector pushed stock futures lower, sending the dollar tumbling against the Japanese yen. The dollar fell as low as 107.38 yen . It was last down 0.5 percent at 107.50 yen.

Against the Swiss franc, the dollar dropped 0.9 percent to 1.0354 francs , letting go of gains made Thursday after the Swiss National Bank elected to keep its borrowing costs on hold at 2.75 percent.

With little of note in terms of U.S. economic on Friday, traders said major currencies were likely to trade in fairly narrow ranges ahead of next week's Federal Reserve interest rate-setting meeting and accompanying statement.

But analysts say the Fed's statement may be less hawkish than some might expect, particularly after a series of inflation-fighting comments from U.S. policy-makers.

"We believe that Fed tightening expectations remain overdone, and under such conditions upside in the greenback is fairly limited," UBS said in a note to clients.

http://moneynews.newsmax.com/markets/do ... 06233.html