Dollar Trades Near Two-Week High on Paulson, Plosser's Comments

By Kosuke Goto and Stanley White

July 23 (Bloomberg) -- The dollar traded near a two-week high against 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 also traded near a two-week high versus the yen and the Swiss franc as Paulson said he expects Congress to approve a rescue plan for Fannie Mae and Freddie Mac. The Australian dollar reached an eight-month high against the yen after a government report today showed inflation accelerated to a two-year high in the second quarter.

``The dollar got a lot of support from U.S. officials,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo, France's second-largest bank by market value. ``The Fed official's comments were very hawkish. Paulson's remarks helped ease concern over troubled government- sponsored enterprises.''

The dollar traded at $1.5789 per euro at 10:32 a.m. in Tokyo from $1.5783 in New York yesterday, when it touched $1.5758, the strongest level since July 10. The dollar was at 107.32 yen from 107.33 yesterday, when it climbed to 107.45, the highest since July 9. The euro traded at 169.45 yen from 169.43.

The U.S. currency may rise to 107.80 yen today, Saito forecast.

The dollar traded at 1.0305 versus the Swiss franc from 1.0311, and was at $1.9921 against the British pound from $1.9917.

Technical Chart

Dollar gains against the yen may accelerate after the U.S. currency closed above its 200-day moving average for the first time since Aug.8, said Toru Umemoto, chief currency strategist at Barclays Capital Inc. in Tokyo.

``This is why the markets are getting more and more bullish on the dollar,'' said Umemoto, who works for a unit of the U.K.'s third-biggest bank. The dollar may rise to 110 yen in three months, Umemoto forecast.

Australia's dollar touched 104.50 yen, the strongest level since Nov. 12, before easing to 104.18 yen, still up from yesterday's close of 104.07 yen. The consumer price index rose 1.5 percent from the first quarter, when it gained 1.3 percent, the Bureau of Statistics said today in Sydney. Economists forecast no change in the rate, a Bloomberg survey showed.

``The Australian dollar still stands out in terms of the currency with the most potential across the board,'' Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, said in an interview with Bloomberg Television. ``Inflation is still an issue for the RBA.''

Rescue Plan

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

``This goes well beyond the two institutions -- Fannie and Freddie,'' Paulson said in an interview with Bloomberg Television after his speech. ``It has to do with investors in the United States and investors all over the world.''

The U.S. currency touched a 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 outstanding U.S. home loans, would be forced to seek a bailout.

Overseas investors' net purchases of Fannie Mae, Freddie Mac, and other so-called agency debt, were $24.2 billion in May the Treasury Department said on July 16. That compares with the $67 billion foreign investors spent on U.S. equities, notes and bonds that month, Treasury data show.

Current-Account Deficit

``Paulson is trying to prevent further declines in dollar assets given that foreign investors' purchases of agency bonds are one source of funding for the U.S. current-account deficit,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today.

The current account is the broadest measure of trade. An economy with a deficit relies on overseas investment to make up for its own savings shortfall.

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.

Rate Increase?

Futures traded on the Chicago Board of Trade showed yesterday a 45.6 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 21.6 percent odds a week earlier. Policy makers next meet Aug. 5.

Gains in the dollar may be limited as the Fed releases its so-called beige book report, a survey of regional economic performance, at 2 p.m. in Washington today. Economic growth was ``generally weak'' in April and May as consumer spending slowed, the Fed said in its June 11 report.

``The beige book will hold a bearish tone on the economy while mentioning rising inflationary pressure,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd. ``We do not expect any rate hike by the Fed this year. With the markets still pricing a rate hike, this will push down the dollar'' to 103 yen by year-end, he said.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net