Forex News : Dollar Heads for Biggest Weekly Gain in Three Years

Dollar Heads for Biggest Weekly Gain in Three Years on Fed View

June 13 (Bloomberg) -- The dollar headed for its biggest weekly gain versus the euro as traders speculated the Federal Reserve will increase borrowing costs this year and Irish voters may have rejected a treaty promoting European Union unity.

The U.S. currency rose to a one-month high against the euro on bets Group of Eight finance ministers meeting this weekend will signal they favor a stronger dollar. The yen was poised for a fifth weekly drop against the euro after the Bank of Japan left its target lending rate at 0.5 percent, the lowest among industrialized nations.

``People will likely keep pricing in Fed rate hikes,'' said David Powell, a currency strategist at Bank of America Corp. in New York. ``That will help the dollar.''

The dollar increased 0.6 percent to $1.5344 euro at 10:31 a.m. in New York, from $1.5439 yesterday. It touched $1.5303, the strongest level since May 8. The U.S. currency was little changed at 108.04 yen, compared with 107.96. The euro fell 0.6 percent to 165.76 yen, from 166.68.

The U.S. currency climbed 2.8 percent this week against the euro, the biggest increase since January 2005. The dollar rose 3 percent versus the yen, the most since December 2004. The yen decreased 0.1 percent versus the euro in its longest stretch of losses since October.

The 15-nation euro weakened as Irish opponents of a new European Union treaty led as counting got under way in a referendum that may decide whether the 27-nation bloc moves toward political unity.

`Public Legitimacy'

``The rejection of the treaty undermines the EU's public legitimacy and may influence public sentiment in countries contemplating joining the euro zone,'' wrote Geoffrey Yu, a currency analyst at UBS AG, in a note to clients today. ``This change may undermine the ECB's price stability mandate in favor of a growth mandate.''

The Australian dollar was headed for a 2.8 percent drop against its U.S. counterpart, the biggest decline in almost three months, and the New Zealand currency was poised for a 2.8 percent decline, its third consecutive decrease. Traders speculated the Fed will raise borrowing costs, narrowing the yield advantage of Australian and New Zealand debt.

Today, the Aussie rose 0.1 percent to 93.56 U.S. cents, while the kiwi dropped 0.6 percent to 74.55 U.S. cents.

Before meeting with her G-8 counterparts today and tomorrow, French Finance Minister Christine Lagarde told reporters in Osaka, Japan, that the U.S. dollar's gains are ``very satisfying.''

Bank of Japan

Foreign-exchange rates should reflect the state of each economy, Bank of Japan Governor Masaaki Shirakawa said at a press conference in Tokyo. It isn't appropriate to focus solely on currencies when setting policy, he added. Shirakawa and his six colleagues left the overnight lending rate unchanged in a unanimous vote in Tokyo.

The U.S. currency strengthened versus the euro on June 9 after U.S. Treasury Secretary Henry Paulson said in an interview with CNBC that he would ``never'' rule out currency intervention. Japan's Finance Minister Fukushiro Nukaga told reporters he and Paulson may discuss currencies outside the G-8 gathering. The group comprises the U.S., Japan, Germany, the U.K., France, Italy, Canada and Russia.

``Sentiment is in favor of a continued dollar recovery,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``There are suggestions left, right and center that there will be intervention.''

Currency Intervention

The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95. Central banks intervene in currency markets by arranging purchases or sales of foreign exchange.

The economic outlook has improved from a month ago, and central bankers will combat any increase in inflation expectations, Fed Chairman Ben S. Bernanke said this week. He said on June 3 he's aware of the impact a falling currency can have on price expectations.

Consumer prices rose 0.6 percent in May after a 0.2 percent increase the prior month, the Labor Department reported today in Washington. The median forecast of 84 economists surveyed by Bloomberg News was for a 0.5 percent advance.

Fed funds futures on the Chicago Board of Trade show a 60 percent chance the central bank will increase the 2 percent target lending rate by at least a quarter-percentage point at its August meeting, compared with 9 percent odds a week ago. The European Central Bank has kept its main refinancing rate at a six-year high of 4 percent since last June.