The dollar touched the highest in more than seven weeks versus the euro
on speculation Federal Reserve policy makers will highlight concern
that inflation needs to be contained while leaving interest rates
unchanged.
``There's high hope riding on the Fed's statement,'' said Michael
Woolfolk, senior currency strategist at the Bank of New York Mellon in
New York, the world's largest custodial bank with over $23 trillion in
assets. ``The market is looking for any excuse to buy the dollar. Lower
crude oil is the primary catalyst for the dollar to rally into the Fed
meeting.''
Oil's decline also pushed the dollar higher versus the euro. The
euro-dollar exchange rate and oil have had a correlation of 0.9 in the
past year, according to Bloomberg calculations. A reading of 1 would
mean they moved in lockstep.
``The underperformance of commodity currencies is amplified by a
commodity sell-off and a dovish Australian central bank,'' said Shaun
Osborne, chief currency strategist at TD Securities Inc. in Toronto.
``That gives a boost to the broad-based dollar rally. The dollar is a
little bit overbought, unless either the Fed sounds a hawkish tone or
oil continues to tumble.''
The Federal Open Market Committee is scheduled to announce its decision
at 2:15 p.m. in Washington. The benchmark rate will be held at 2
percent, according to all 69 economists surveyed.
Futures on the Chicago Board of Trade showed a 34 percent chance the
Fed will raise the target rate for overnight lending between banks by
at least a quarter-point at the meeting on Sept. 16.
Consumer inflation accelerated to 0.8 percent in June, the fastest pace
since September 2005, the U.S. Commerce Department reported yesterday.
Accelerating inflation adds to the risk that three members of the
committee will dissent for the first time since 1992. Gary Stern,
president of the Fed's Minneapolis bank, and the Philadelphia Fed's
Charles Plosser joined Dallas's Richard Fisher since the last meeting
in June in calling for an increase in rates to limit price increases.
The trio has more clout than usual because two seats assigned to Fed
governors on the 12- member panel will be vacant at the end of this
month.
The yen rose against the 16 most-actively traded currencies, gaining
the most versus Brazil's real, the rand and krone as well as the
Australian dollar as investors reduced holdings of high-yielding assets
funded by the Japanese currency. Japan's 0.5 percent benchmark interest
rate compares with 13 percent in Brazil.
``There is concern the world economy is going to be bad,'' said Toru
Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., a
unit of Britain's third-biggest bank. ``The yen is being buoyed by risk
aversion.''