Dollar dips as markets reconsider Fed hikes

Dollar dips as markets reconsider Fed hikes

By Lisa Twaronite, William L. Watts & Nick Godt, MarketWatch

Last Update: 6/18/2008 1:08:00 PM

NEW YORK (MarketWatch) - The dollar headed lower in afternoon U.S. trade
Wednesday, with traders reconsidering bets that the Federal Reserve will be
raising interest rates later this year with economic woes hitting stocks on Wall
Street.

With the data calendar remaining sparse in both Europe and the U.S. Wednesday,
markets reacted to renewed concerns over ailing financial firms, after Fifth
Third Bancorp. (FITB) cut its dividend while Morgan Stanley’s (MS) results
disappointed.

At the same time, FedEx Corp. (FDX) posted weak results with surging energy
prices boosting its operating costs, and fueling renewed concerns about economic
growth.

In early afternoon U.S. trade, the dollar index, which measures the U.S. unit
against a basket of major currencies, fell 0.02% to 73.50.

The euro was buying $1.5512, compared with $1.5511 in late North American trading
Tuesday. The dollar bought 107.88 Japanese yen, compared with 108.12 yen late
Tuesday.

The dollar began losing ground Tuesday after news reports in The Wall Street
Journal and the Financial Times said U.S. Federal Reserve officials were tilting
away from a rate hike in August. The news reports tamped down expectations the
Fed would move to quickly reverse aggressive rate cuts this fall.

Remarks Wednesday morning by Luxembourg Central Bank President Yves Mersch, who
is also a member of the European Central Bank’s rate-setting governing council,
helped buoy the euro, said strategists at ABN Amro.

“We expect that interest rates will remain at historically high levels, probably
until the end of this year,” Mersch said, adding that inflation expectations
“seem to us to be still well-anchored in the medium to long term,” according to
Dow Jones Newswires.

Mersch also echoed earlier statements by ECB officials on the possibility of a
rate hike in July, saying the ECB remained in a “state of elevated alert” over
inflation risks.

The British pound extended losses. Sterling slipped Tuesday after Bank of England
Gov. Mervyn King indicated in a letter to Chancellor of the Exchequer Alistair
Darling that the central bank was unlikely to embark on a series of rate hikes to
rein in surging inflation. See full story.
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Minutes of the Monetary Policy Committee meeting earlier this month showed that
members voted 8-1 to leave the Bank of England’s key lending rate unchanged at
5%.

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