Dollar Rises Against Yen on Speculation Fed to Limit Rate Cuts

By Kosuke Goto and Stanley White

April 7 (Bloomberg) -- The dollar rose the most in almost a week against the yen and euro on speculation the Federal Reserve will limit interest-rate cuts as inflation accelerates and confidence returns to credit markets.

The currency strengthened against the British pound and the Swiss franc on speculation minutes of the March 18 Fed meeting, due tomorrow, will show increased concern over consumer prices. The euro also fell as European finance ministers said the credit crisis will plague their economies through 2009.

``The minutes could be supportive of the dollar, given the Fed signaled uncertainty over the inflation outlook,'' wrote Ashley Davies, a strategist in Singapore at UBS, the second- largest currency trader. It is ``suggesting that the Fed is reluctant to cut rates further,'' he wrote.

The dollar rose 1 percent to 102.45 yen as of 2:03 p.m. in Tokyo compared with 101.47 yen in New York on April 4. The U.S. currency climbed to $1.5668 a euro, from $1.5737 in New York. It rose to $1.9897 against the British pound from $1.9932. The dollar may reach $1.55 per euro over one month and $1.47 over three months, Davies forecast.

The dollar's rebound followed a 0.8 percent decline against the yen on April 4 as the U.S. Labor Department said payrolls fell for a third straight month in March.

Futures traders have doubled bets against the dollar in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October.

Euro Weakness

The euro also fell today after European finance chiefs and central bankers said the credit squeeze increasingly threatens to undermine European growth at the end of two days of talks in Brdo, Slovenia, on April 5. It also declined to 78.78 pence against the pound from 78.94.

The yen and Swiss franc fell as a gain in stocks prompted investors to buy high-yielding assets financed by loans in Japan and Switzerland. The yen declined to 160.58 a euro from 159.69, as the MSCI Asia Pacific Index rose 0.5 percent. The franc slid to 1.5856 per euro from 1.5831.

The yuan rose to the strongest since the end of a dollar link in 2005 on speculation that China will accelerate its pace of appreciation to help stem inflation at an 11-year high. The Chinese currency advanced 0.2 percent to 7.0025 per dollar.

The Dollar Index traded on ICE Futures in New York, which tracks the currency against those of six trading partners, gained to 72.231 from 72.021 on April 4. It reached an all-time low of 70.698 on March 17, when the dollar dropped to a record of $1.5903 against the euro.

Federal Reserve

Futures on the Chicago Board of Trade put 36 percent odds on the Fed cutting its 2.25 percent target rate for overnight lending between banks by a half-percentage point at its next scheduled meeting on April 30, compared with 48 percent a week earlier. The rest of the bets are for a quarter-point reduction.

``The excessive credit uneasiness in the financial markets is being soothed out,'' said Kenta Inoue, economist and currency analyst in Tokyo at Mitsubishi UFJ Securities, a unit of Japan's largest publicly listed lender. ``This sentiment is giving some relief to the dollar.''

The yen weakened against all 16 major currencies as a slowing Japanese economy and the falling approval rating of Japanese Prime Minister Yasuo Fukuda encouraged investors to buy higher-yielding currencies.

Bank of Japan

The Bank of Japan will keep its benchmark rate at 0.5 percent on April 9 as economic expansion cools, according to all 37 economists surveyed by Bloomberg News. Traders see a 59 percent chance the bank will cut the key rate by year-end, according to JPMorgan Chase & Co. calculations.

Fukuda's approval rating fell to a record low of 24 percent in the latest Mainichi newspaper survey.

``The Fukuda administration is really in bad shape,'' said Joseph Kraft, head of capital markets in Tokyo at Dresdner Kleinwort, an investment bank owned by Germany's Allianz SE. ``A decline in Fukuda's approval ratings leads to political turmoil and raises the possibility of an early dissolution of the Lower House. This could prompt stock-selling and yen-selling.''

The yen may move between 97 and 105 per dollar this quarter, he forecast.

Technical Chart

The Australian dollar rose to 94.24 yen from 93.64 yen. The New Zealand dollar climbed to 80.72 yen from 80.10 yen.

``The modest growth in risk appetite is good news for risky assets such as the Australian and New Zealand dollars, and bad news for the Swiss franc and the yen,'' wrote Barclays Capital's analysts led by David Woo, London-based global head of currency strategy, in a research note today.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.

The Canadian dollar's advance may stall around 102 yen after the currency had a so-called ``key day reversal'' on April 4, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

The level represents so-called resistance on the Elliott wave and Fibonacci charts, Edgeley wrote in a research note. A ``key day reversal'' is a chart pattern that indicates the reversal of a trend. Canada's dollar traded at 101.69 yen from 100.60 yen in New York on April 4.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: April 7, 2008 01:10 EDT