Dollar Rises to Six-Month High Against Euro on Fed Rate Outlook

Jan. 28 (Bloomberg) -- The dollar rose to a six-month high against the euro on speculation the Federal Reserve will relax its low-interest rate stance amid signs the U.S. economy is gathering momentum, boosting demand for the nation’s assets.

The dollar was near a four-month high against the Swiss franc after Kansas City Fed President Thomas Hoenig said the time has come to change the promise to keep rates low and before a report forecast to show the U.S. economy expanded at the fastest pace in almost four years. The euro was near its weakest in nine months against the yen on concern that budget deficits in the 16-nation region will widen, backing the case for the European Central Bank to keep interest rates low.

“With Hoenig sounding relatively hawkish, they are a bit more upbeat than people had expected,” said Danica Hampton, a senior strategist at Bank of New Zealand Ltd. in Wellington. “The U.S. dollar is going to find a bit more support. I think that will be further supported with the U.S. GDP data.”

The dollar advanced to $1.4004 per euro as of 10:01 a.m. in Tokyo from $1.4024 in New York yesterday, after climbing to $1.3990, the strongest since July 15. The dollar was at 90.14 yen from 90 yen. The euro bought 126.26 yen from 126.25, after falling to 125.24 yesterday, the weakest since April 28. The greenback traded at 1.0523 francs from 1.0501 yesterday, when it touched 1.0526, the highest level since Sept. 8.

The Fed reiterated at the conclusion of its two-day policy meeting yesterday that interest rates will stay low for an “extended period” and held its target lending rate at zero to 0.25 percent. The Fed restated its intention to cease buying mortgage-backed securities in March.

Dollar Index

The Nikkei 225 Stock Average rose 0.6 percent after the Standard & Poor’s 500 Index yesterday advanced 0.5 percent.

“The dollar-yen will be supported as long as Asian stocks hold up after U.S. stocks went up a bit and the FOMC meeting caused the dollar to be bought back,” Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo, wrote in a research note today.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, increased 0.2 percent to 78.813.

Economists in a Bloomberg survey forecast U.S. gross domestic product expanded 4.6 percent in the fourth quarter after gaining 2.2 percent in the third. The Commerce Department in Washington is set to release the data tomorrow. That would be the strongest since the first three months of 2006.

Fiscal Deficits

The euro traded near a five-month low versus the pound on speculation that Greece and other countries in the euro area will struggle to cut their fiscal deficits, supporting the case for the ECB to maintain its 1 percent benchmark interest rate.

The European Commission said in a report yesterday that finance ministers agreed Greece “had not taken effective action to correct the deficit by the 2010 deadline agreed at the beginning of 2009.” Portugal’s 2010 budget plan may not be enough to achieve the pledge of trimming the deficit by more than half in three years, risking a downgrade of its creditworthiness, economists and bond analysts said.

“European sovereign risks are still dominating sentiment, suggesting interest rates there will likely stay low,” said Yuji Saito, director of the foreign exchange department at Calyon Bank in Tokyo. “The trend is for the euro to be sold.”

The euro traded at 86.76 pence from 86.73 pence yesterday. It touched 86.51 pence on Jan. 20, the lowest since Aug. 21.