Tide may be turning for dollar

By Natsuko Waki

LONDON (Reuters) - The tide may be turning at last for the U.S. dollar after seven years of decline as policymakers recognize the inflationary threat of an endlessly weakening greenback, whose losses have driven up oil and commodity prices.

Speeches this week by central bank governors from the United States, the euro zone and Japan as well as other finance chiefs from major economies will probably reinforce the view that authorities may finally wish to see a floor for the dollar.

Investors will also scrutinize consumer price figures from Britain, the euro zone and the United States and growth indicators from the euro zone and Japan, which could confirm a difficult picture of slowing growth and rising inflation.

After hitting all-time troughs in mid-March, the dollar has risen more than 3 percent to hit a two-month peak against its six major peers in the past week, coinciding with growing expectations that the worst of the credit crisis maybe over.

The seven-week rally comes after a downtrend since 2001 that reduced the U.S. currency's value by more than 40 percent.

A weakening dollar has contributed to a surge in the cost of raw materials, which are mainly priced in the U.S. currency, with everything from oil to corn and copper hitting historic highs.

And inflation dangers pose a headache for central banks, especially the U.S. Federal Reserve which has cut interest rates seven times since September to 2 percent, the lowest since December 2004, to shore up the economy.

"It seems as if U.S. Treasury and possibly even Federal Reserve officials might be starting to view the dollar's slide as an inflation risk," said Steven Pearson, chief strategist at Bank of Scotland.