Dollar Trades Near 1-Month High Before Federal Reserve Meeting

By Stanley White

Aug. 4 (Bloomberg) -- The dollar traded near a one-month high against the euro before a Federal Reserve meeting tomorrow at which policy makers may leave interest rates on hold and signal that prices are rising too quickly.

The U.S. currency was also near a one-month high against the yen before data today that is forecast by economists to show the Fed's preferred measure of prices rose in June by the most in six months, backing the case for higher borrowing costs. The New Zealand dollar traded near a 10-month low on speculation the yield advantage of the nation's bonds will shrink as a slowing economy prompts more rate cuts.

``The dollar should remain firm as we're moving away from a weak trend,'' said Akio Shimizu, chief manager of foreign- exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The Fed is slowly inching toward raising rates. I expect them to confirm their slightly more hawkish stance.''

The dollar traded at $1.5575 per euro at 10:06 a.m. in Tokyo from $1.5564 late in New York on Aug. 1 when it reached $1.5515, the highest since June 24. The dollar bought 107.55 yen from 107.71 yen at the end of last week. It touched a one-month high of 108.38 on July 31. The euro traded at 167.52 yen from 167.55 yen. The dollar may rise to $1.5520 versus the euro and 107.90 yen today, Shimizu forecast.

New Zealand's currency bought 72.80 U.S. cents from 72.73 cents late last week in New York, when it fell to 72.47 cents, the lowest since Sept. 19, 2007.

Investors expect the Reserve Bank of New Zealand to lower borrowing costs by 1.5 percentage points over the next year, according to a Credit Suisse Group index based on trading of interest-rate swaps. The RBNZ lowered rates by a quarter point to 8 percent on July 24, saying more cuts may be necessary.

The Fed

The Fed will keep its target lending rate at 2 percent tomorrow, according to the median estimate of economists surveyed by Bloomberg News. The U.S. central bank should raise rates ``sooner rather than later'' to contain inflation expectations, Philadelphia Fed President Charles Plosser said on July 22.

The personal consumption expenditure index, the Fed's preferred price gauge, rose 2.2 percent in June after excluding food and fuel, according to economists surveyed by Bloomberg. It climbed 2.1 percent the previous month.

Futures contracts on the Chicago Board of Trade showed a 53 percent chance the Fed will raise its target rate by at least a quarter-percentage point on Oct. 29, up from 51 percent a day earlier.

Net Shorts

Currency traders reversed their bets that the yen will gain against the U.S. dollar, data based on futures contracts from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 6,280 on July 29, compared with net longs of 10,524 a week earlier.

Gains in the dollar may be limited by speculation data this week will show the U.S. services industry contracted for a second month and home sales declined, casting doubt on the strength of the U.S. economy.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, rose to 48.8 from 48.2 in June, according to a Bloomberg News survey. A reading below 50 indicates contraction. The Tempe, Arizona - based purchasing managers' group will release the data tomorrow.

Pending home resales fell 1 percent in June, the fourth decline in six months, economists project a report from the National Association of Realtors will show on Aug. 7.

Consumers are trimming spending as gasoline prices remain near $4 a gallon, home values fall, credit becomes more difficult to obtain and the job market weakens.

``The ISM data may pose some downside risks to the dollar,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager. ``There's still quite a lot of uncertainty about whether the Fed can actually deliver an increase in rates given the state of the economy.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net