FOREX-Euro dips vs dollar as Fed's rate path mulled
* Fed minutes seen conveying eventual Fed tightening
* Euro potential gains capped by Greek debt issues (Adds quotes, updates prices)
By Julie Haviv
NEW YORK, May 18 (Reuters) - The euro traded little changed against the dollar on Wednesday, but remains vulnerable to losses given Greece's debt situation and raised expectations that a U.S. Federal Reserve rate hike may come sooner than expected.
U.S. central bank policymakers discussed how to eventually normalize monetary policy at their April meeting. While policymakers did not make any decisions on their upcoming strategy, they did agree on principles to guide it. For details, see [ID:nN18276699]
Some Fed policymakers said they saw a rise in inflation risks, suggesting the Fed might need to tighten monetary policy sooner than currently anticipated. U.S. interest rate futures fell on Wednesday. [ID:nN18251228]
"While we're not expecting any change in the immediate future, it's clear that the Fed is definitely eyeing an exit strategy from its extremely accommodative policy stance," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington.
"Ultimately, that suggests the dollar will eventually find some support as a result of rising interest rates later this year," he added.
The dollar index .DXY was flat at 75.42, below a six-week high around 76.0 hit earlier in the week. The dollar traded 0.3 percent higher against the yen at 81.70 JPY=. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For an instant view, see [ID:nN18180200]
For a graphic on the Fed's balance sheet, see:
But Dan Dorrow, head of research at Faros Trading in Stamford, Connecticut, said despite the contents of the Fed's meeting minutes, interest rates still favor the euro over the dollar.
"Until there are signs that inflation is picking up or there is a significant pickup in economic momentum, the Fed will likely refrain from raising rates for quite some time," he said.
In late afternoon New York trading, the euro was flat at $1.4236 EUR=EBS. A near-term upside hurdle is at its 55-day moving average around $1.4290.
The European Central Bank has already embarked on a path of monetary tightening, raising rates last month for the first time since July 2008.
The Fed's meeting, and a lack of new negative developments in Greece, prompted investors to turn their attention back to interest rate differentials, which have firmly favored the euro against the dollar this year. The single currency has gained about 6.4 percent year-to-date on the dollar.
GREECE REMAINS A WILD CARD
There were opposing views on whether Greece should overhaul its massive debt. Euro zone finance ministers on Tuesday floated the idea of a "soft" restructuring, but the Greek government did not appear keen to adopt their suggestion.
Greece's Finance Minister George Papaconstantinou said on Wednesday that no magic scenarios can take Greece out of its crisis. [ID:nATH006083]
Some analysts argued that a restructuring in Greece would be unlikely at least until European officials are confident the contagion risks to other weak euro zone countries would be low.
Faros Trading's Dorrow said market pricing of EU periphery event risk is overdone.
"There is a lot of interest on all sides to resolve this issue, allowing a return of ECB stance relative to Fed stance," he said. "The dollar's recent rise is a correction and is transitory and by June or July the euro should be above $1.50."
In line with euro weakness, the premium investors demand to hold Greek government bonds rather than benchmark German Bunds rose to one-week peaks on Wednesday.
Ongoing U.S. fiscal issues may limit demand for the U.S. dollar, which has bounced following a heavy selling trend this month, as investors trimmed overstretched bets to sell the greenback.
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