Dollar May Extend Gains After Remarks by Paulson, Fed Official

By Ye Xie and Bo Nielsen

July 23 (Bloomberg) -- The dollar may rise for a second day versus the euro after Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.

The greenback advanced the most against the euro in more than two weeks yesterday as Paulson also said he expects Congress to approve a plan to support Fannie Mae and Freddie Mac. The U.S. currency extended its increase after breaking through $1.59, where orders to sell the euro were clustered, and rose further as oil prices fell, traders said.

``The Fed's hawkish tone and Paulson's message that the government is on top of the issues in the financial sector helped underpin the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

The dollar traded at $1.5778 per euro at 6:07 a.m. in Tokyo, after rising 0.9 percent yesterday and touching $1.5758, the strongest level since July 10. The dollar was at 107.355 yen, after advancing 0.8 percent. The yen traded at 169.40 per euro, following a less than 0.1 percent increase.

The Mexican peso rose 0.9 percent to 10.0365 yesterday versus the dollar, the strongest since October 2002, on speculation the central bank will increase borrowing costs again to contain inflation. Banco de Mexico policy makers will raise the target lending rate by a quarter-percentage point to 8.25 percent at their next meeting Aug. 15, according to the median estimate of 23 analysts surveyed by Citigroup Inc.

`Boost Confidence'

The dollar strengthened yesterday as Paulson said in a speech in New York that he's ``confident'' that lawmakers will pass the bill to ``boost confidence'' in Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing. He reiterated that a strong dollar is ``really very important.''

The U.S. currency touched the record low of $1.6038 per euro on July 15 as traders speculated that the companies, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, may fail to survive the housing slump.

``His comments helped the market get over the mass hysteria about Fannie and Freddie,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.

Philadelphia Fed President Charles Plosser said in a speech yesterday in King of Prussia, Pennsylvania, that the U.S. central bank should raise interest rates ``sooner rather than later.'' He argued against cuts in two Fed decisions this year.

The two-year U.S. Treasury note's yield rose 12 basis points, or 0.12 percentage point, to 2.72 percent yesterday. The rate was 187 basis points lower than that of the comparable- maturity German bund, the narrowest since July 11.

`Hawkish Comments'

``Plosser's hawkish comments pushed Treasury yields higher,'' contributing to the dollar's turnaround, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

Futures traded on the Chicago Board of Trade showed yesterday a 49 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by Sept. 16, up from 41 percent odds on July 21. Policy makers next meet Aug. 5.

The Fed will release its survey of regional economic conditions, known as the Beige Book because of the color of its cover, at 2 p.m. in Washington.

Crude oil for August delivery fell 2.4 percent to $127.95 a barrel yesterday after touching $125.63, the lowest level since June 5. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

ECB Stance

The euro traded earlier yesterday near the all-time high versus the dollar as the Italian daily publication La Stampa reported that European Central Bank executive board member Lorenzo Bini Smaghi said the bank's main refinancing rate isn't ``exactly restrictive'' at 4.25 percent.

``The ECB has continued to make hawkish noises, meaning the euro is going to be quite well-supported in the near term,'' said Ian Stannard, a London-based senior currency strategist at BNP Paribas SA. The dollar may still rebound to $1.50 per euro by the end of the quarter, he said.

The Canadian dollar declined 0.9 percent to C$1.0085 per U.S. dollar yesterday, the biggest drop this month, as oil prices fell. Commodities such as oil and gold make up half of the country's exports.

The Czech koruna fell 2.4 percent yesterday against the euro, the most since October 1999, after Governor Zdenek Tuma of the central bank said policy makers may reduce interest rates as soon as next month because the koruna's advance threatens to ``damage'' the economy. The koruna dropped to 23.486 per euro, from a record high of 22.877 set July 21. It has gained 13 percent against the euro this year for the best performance among currencies of developing countries.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net.