Dollar Rises as Fed Official Suggests ‘Sooner’ Rate Increase

By Yoshiaki Nohara and Ron Harui

Oct. 7 (Bloomberg) -- The dollar rose for a fifth day against the pound after a Federal Reserve official said the central bank should start raising interest rates “sooner rather than later,” boosting demand for U.S. assets.

The dollar gained for the first time in four days against the euro as a technical indicator signaled the U.S. currency’s decline was excessive. The yen fell versus the dollar as Asian stocks extended a global rally amid signs the worldwide economy is recovering, damping demand for Japan’s currency as a refuge.

“The Fed is showing signs to exit, which is positive for the dollar,” said Toshiya Yamauchi, a Tokyo-based manager of the foreign-exchange margin trading department at Ueda Harlow Ltd. “While U.S. economic data continue to show mixed results, it’s clear the economy has reached the bottom and is beginning to rebound.” 

The dollar rose to $1.5882 per pound at 11:50 a.m. in Tokyo from $1.5922 in New York yesterday. The greenback gained to $1.4685 per euro from $1.4722 yesterday, when it reached $1.4762, the weakest level since Sept. 24. The U.S. currency strengthened to 88.96 yen from 88.82 yen. The euro was at 130.63 yen from 130.76 yen.

The dollar advanced against 14 of its 16 major counterparts after Kansas City Fed President Thomas Hoenig yesterday said raising interest rates wouldn’t derail the U.S. economic recovery.

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” Hoenig said in a speech in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

Fed Comments 

Hoenig’s comments came after Australia yesterday became the first among Group of 20 economies to raise borrowing costs since the start of the financial crisis. The comments echoed those by Fed Governor Kevin Warsh, who said on Sept. 25 the central bank may need to tighten “with greater force than is customary,” and Richmond Fed President Jeffrey Lacker, who said on Oct. 1 that rates may need to be raised even with unemployment near 10 percent.

The euro weakened as the currency’s 14-day stochastic oscillator versus the dollar rose to 66.5 yesterday from 45.9 on Oct. 5, nearing the 80 level some traders use as a signal that an asset has risen too quickly and is poised to decline.

Short-Covering 

“The dollar is undergoing some short-covering as its losses may be overdone a bit,” said Nobuaki Kubo, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of New York-based Brown Brothers Harriman & Co. “However, the greenback’s rebound is likely to be limited, given that Asian stocks are rising.”

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in an asset’s value. A short position is a bet an asset will decline.

The yen dropped as Japan’s Nikkei 225 Stock Average rose 0.9 percent, and the MSCI Asia Pacific Index of regional shares advanced 1.1 percent. The Standard & Poor’s 500 Index gained 1.4 percent in New York yesterday.
“Stock gains are weighing on the yen, encouraging investors to take risk,” said Takashi Kudo, director of foreign-exchange sales at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: October 6, 2009 22:53 EDT