By Eric Burroughs
TOKYO, May 7 (Reuters) - The dollar edged up on Wednesday
after a Federal Reserve official said that interest rates will
eventually need to be raised, highlighting that the Fed may be
done relaxing policy after its aggressive run of rate slashes.
Kansas City Fed President Thomas Hoenig said late on Tuesday
that rates will need to be raised in a timely way as the central
bank grapples with a serious threat of inflation, helping the
dollar against the euro. []
The dollar has rebounded and hit a two-month high against a
basket of currencies last week as investors believe the Fed is
set to keep rates on hold in coming months after having trimmed
them to 2 percent last week.
"It's unlikely the Fed will cut rates in June as long as U.S.
economic indicators remain steady," said Koji Fukaya, senior
currency strategist at Deutsche Bank in Tokyo.
As the effect of fiscal stimulus is felt in coming months,
"the Fed will be able to spend more time assessing the economy
before making a move," he added.
In contrast, the European Central Bank is facing mounting
signs of a slowing euro zone economy that has prompted market
players to think a rate cut could yet be on the cards.
The higher-yielding Australian and New Zealand dollars dipped
as some traders booked profits on their rise against the yen to
near two-month peaks as waning worries about the credit crisis
have boosted global stocks.
"The big picture is that the dollar is rebounding, the euro
is losing some momentum and currencies of resource-rich countries
have been firm, while investors see no reason to buy the yen,"
Fukaya said.
Asian equity markets got a boost from the rise on Wall Street
after officials of top U.S. mortgage financing company Fannie Mae
<FNM.N> said they were cautiously optimistic that the worst of
the credit crisis had passed even after posting a $2.2 billion
quarterly loss.
U.S. Treasury Secretary Henry Paulson told the Wall Street
Journal in an interview that "the worst is likely to be behind
us" from the crisis spawned by surging defaults on U.S. home
mortgages. []
Before trimming gains, Japan's Nikkei average <> rose
nearly 1 percent to its highest in nearly four months as the
country's financial markets reopened after a four-day break.
"The market is going to be focused less on the financial
crisis than on an economic slowdown, reading the tea leaves of
the data," said Sean McGoldrick, head of FX trading in Tokyo at
Morgan Stanley.
CARRY TRADES, OIL EFFECT
The dollar was little changed at 104.71 yen <JPY=>, slipping
from an early high of 104.97 yen in subdued trade.
When stocks rise, the low-yielding yen is often used as a
cheap source of funds to buy higher-yielding currencies in the
carry trade. Expectations that the Bank of Japan's will keep
rates at the low 0.5 percent in the months ahead also encouraged
carry trades, traders said.
But Japanese exporters had orders to sell the dollar around
105.30 yen as part of their regular repatriation of overseas
earnings, potentially limiting any dollar gains for now, traders
said.
The euro slipped 0.2 percent to $1.5508 <EUR=>, down from a
high of $1.5595 on Tuesday and near the five-week low of $1.5360
struck last Friday after U.S. data showed companies cutting fewer
workers than expected in April.
The payrolls figures convinced more investors that the Fed
may be done cutting rates after slashing them aggressively from
5.25 percent since last September.
The single European currency dipped 0.1 percent to 162.40 yen
<EURJPY=R>.
The dollar has slipped this week on the jump in oil prices to
record peaks above $122 a barrel <CLc1>, which is seen as a
negative for the currency. Oil was little changed at $121.79.
Typically the dollar moves in the opposite direction of oil
and gold prices, while the steep cost of crude is also seen
prompting Middle East producers to shift some of the dollar-based
windfall into other currencies.
The Aussie edged down 0.2 percent to 99.24 yen <AUDJPY=R> but
was just below the two-month peak near 99.70 yen hit on Monday.
(Additional reporting by Tetsushi Kajimoto; editing by Brent
Kininmont)
