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Dollar Has Weekly Advance as Fed Highlights Inflation Risks
By Min Zeng
Nov. 18 (Bloomberg) -- The dollar gained this week against the euro and yen after Federal Reserve officials signaled concern inflation remains a risk.
Dallas Fed Bank President Richard Fisher said yesterday policy makers have ``no tolerance'' for inflation above 2 percent. Fed Bank of St. Louis President William Poole said Nov. 16 the U.S. is not ``out of the woods'' on inflation. The dollar trimmed some of its weekly advance after a U.S. report yesterday showed housing starts tumbled to a six-year low.
``The Fed is keeping an eye on inflation,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``A rate cut is still a long way off.''
The dollar strengthened 0.1 percent this week versus the euro and yen. It increased to $1.2829 per euro in New York yesterday from $1.2841 a week earlier.
The U.S. currency rose to 117.75 yen yesterday from 117.62 on Nov. 10.
Higher interest rates boost the allure of dollar- denominated assets. The Fed has kept its overnight interest rate on loans between banks at 5.25 percent since August, after lifting borrowing costs 17 consecutive times over two years.
Measure of Inflation
A price gauge tied to U.S. consumer spending patterns excluding food and energy costs, the Fed's preferred measure of inflation, rose 2.4 percent in September on a year-over-year basis after a 2.5 percent increase a month earlier, the Commerce Department said on Oct. 30.
Fed Chairman Ben S. Bernanke is among policy makers who have said they would be comfortable with a 1 percent to 2 percent increase in the measure over a 12-month period.
``Most members judged that the downside risks to economic activity had diminished a little,'' the Fed said in minutes of its gathering on Oct. 24-25 released in Washington on Nov. 15. ``All members agreed that the risks to achieving the anticipated reduction in inflation remained the greatest concern.''
Fed Bank of Chicago President Michael Moskow said Nov. 16 that ``some additional firming'' of policy may be needed.
``Hawkish commentaries from the Fed officials are giving the dollar a bit of support,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The Fed got a rate cut well off the table as they are still concerned about inflation.''
The dollar pared some of its gains after a Commerce Department report yesterday said builders broke ground on an annual rate of 1.486 million new homes in October, down 14.6 percent from September's pace.
Building permits dropped to a 1.535 million annual pace, a record ninth straight decline and the lowest since December 1997, from a revised 1.638 million.
The data ``raised concern that the housing slowdown will continue to be a drag on growth in the fourth quarter,'' said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million under management. ``This puts the dollar under pressure.''