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Dollar rallies after durable goods data, oil drops

Analysis

The dollar rose broadly on Wednesday after a report showed new orders for US durable goods fell by less than expected in April, supporting the view the Federal Reserve may keep interest rates on hold or even raise them by the end of the year.

Demand for the greenback started to increase earlier in the trading session, buoyed by reports of rising German inflation and as oil slid further from its recent record highs. New orders fell 0.5% last month, less than the 1% drop expected by analysts in a Reuters poll. Stripping out transportation, orders rose 2.5%, the biggest gain since July, the Commerce Department said.

“Durable goods dropped by much less than expected on the headline number and when we strip out transportation, we see durable goods rose sharply,” said Omer Esiner, a currency analyst at Ruesch International in Washington. “These numbers bode well for those looking to the Fed to possibly raise rates towards the end of this year and will likely support the dollar throughout the session.” In morning trading in New York, the euro was last down 0.3% at $1.5630. The dollar also rallied 0.3% against a basket of six currencies to trade at 72.654.

Against the yen, the dollar was 0.8% higher at 105.08 “People are still inclined to buy the dollar after we broke above 104.90 resistance in dollar-yen and below euro-dollar short-term support around 1.5640,” said Shaun Osborne, a senior currency strategist at TD Securities, in Toronto.

 
INFLATION FEARS

In Germany, annual inflation in three states topped 3% in May, highlighting upside risks to the reading for the euro zone’s biggest economy, due later on Wednesday. The data supported expectations for the European Central Bank to retain its hawkish, inflation-fighting stance despite signs of an economic slowdown seen in recent sentiment surveys from euro zone member states. Other figures in Europe showed the outflow of investment from the euro zone accelerated in March.

Analysts said the euro may still rebound to recent one-month highs even after weak data as the ECB’s policy stance is seen unchanged. “We had sentiment data from Europe Tuesday which were weak, so of course we get people nervous about Q2 activity, and then we get CPI numbers today underlining the fact that Europe has an inflation issue -- so that muddies the water,” Calyon senior currency strategist Daragh Maher said.

Oil prices fell further from last week’s record $135.09 a barrel. Surging oil prices have fanned fears about the ability of US consumers and businesses to weather the credit- and housing market-led downturn. US short-term interest rate futures show that investors widely expect the Federal Reserve to raise interest rates by 0.25 percentage point to 2.25% by year-end. (Reuters)

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