Dollar Trades Near Seven-Week High on Fed's Comments, Oil Drop

By Candice Zachariahs and Ye Xie

Aug. 6 (Bloomberg) -- The dollar traded near a seven-week high against the euro as oil tumbled and the Federal Reserve left borrowing costs unchanged yesterday.

The U.S. Dollar Index traded on ICE Futures in New York touched the strongest in more than a month as Fed policy makers said ``downside risks'' to growth remain, while inflation is a ``significant concern.'' The dollar rallied against the Norwegian krone and Canadian dollar after oil fell to the lowest since May.

``It seems to be a pretty balanced statement,'' said Steven Englander, a currency strategist at Lehman Brothers Holdings Inc. in New York. ``This dollar rally clearly gets support from commodities. The recognition that the rest of the world is under pressure gives the dollar a boost.''

The dollar traded at $1.5454 per euro at 6 a.m. in Tokyo, after rising 0.8 percent yesterday when it touched $1.5447, the strongest level since June 16. The U.S. currency was at 108.36 yen. The euro traded at 167.45 yen, after falling 0.7 percent yesterday.

The U.S. currency has gained 1.1 percent against the euro since April 30, the last time the Fed lowered its target rate. The Fed cut borrowing costs seven times since September from 5.25 percent. The dollar fell 10.5 percent between September and April.

Canada's Dollar

Canada's dollar touched C$1.0453 against its U.S. counterpart, the lowest since Sept. 11, as crude oil fell below $119 a barrel for the first time since May. Oil and gold account for half of Canada's exports.

Norway's krone fell 1.4 percent yesterday to 5.1999 per dollar after touching 5.2035, the weakest since June 16. Norway is the world's fifth-largest oil supplier.

Oil's decline also pushed the dollar higher versus the euro. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

The Fed said yesterday financial markets remained ``under considerable stress,'' while the outlook for prices is ``highly uncertain.'' Dallas Fed President Richard Fisher dissented for a fifth time this year, preferring an increase.

U.S. stocks advanced yesterday for the first time in four days.

``With oil prices trading the way they are, and equity markets responding positively, I think the dollar is going to hold up pretty well this week,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

Dollar May Strengthen

The dollar may strengthen beyond $1.53 per euro this week, Moran said.

Federal Reserve Bank of Philadelphia President Charles Plosser said July 22 that the central bank should raise interest rates ``sooner rather than later'' to lower inflation and prevent price expectations from getting out of control. Plosser has argued against cutting rates at two Fed meetings this year.

``The Fed's statement matched expectations,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``They will keep the rate on hold at least until later this year.''

Traders yesterday pared bets the Fed will raise interest rates on Sept. 16. Futures on the Chicago Board of Trade showed a 27 percent chance the Fed would raise its target lending rate at least a quarter percentage point next month, down from 32 percent on Aug 4.

``It won't be surprising if some investors interpret this as slightly more dovish,'' said Todd Elmer, currency strategist at Citigroup Global Markets in New York. ``We don't expect the Fed statement to act as a catalyst for a sharp move from euro- dollar.''

Consumer Inflation

Consumer inflation accelerated to 0.8 percent in June, the fastest pace since September 2005, the U.S. Commerce Department reported yesterday.

``They are clearly not signaling tightening,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The dollar has already gained some ground. While commodities continue tanking, the rally can last a little bit longer here.''

The dollar fell to its all-time low of $1.6038 per euro on July 15 after Fed Chairman Ben S. Bernanke told the Senate Banking Committee that growth and inflation risks have both increased.

To contact the reporters on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net