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Dollar has biggest two-day rally against euro in six months

The dollar is heading for its biggest two-day gain against the euro since July on speculation US reports today will show housing and manufacturing rebounded.

The US currency rose against 13 of the 16 most active currencies after Federal Reserve officials said that while risks to growth increased, inflation was „the predominant concern,” minutes of the December 12 meeting released yesterday said. A report showed euro-region inflation last month held below the European Central Bank's 2% target. „The minutes were perhaps more hawkish than people were expecting, in that the Fed is still saying that inflation is the concern,” said Lee Ferridge, a proprietary trader at Rabobank Groep in London. „It's rational that people are following through from yesterday and buying dollars.”

The dollar traded at $1.3099 per euro at 11:14 a.m. in London, from $1.3169 in New York. It was at ¥119.40, from 119.39. The euro traded at ¥156.40, from 157.23, after reaching a record high of 158.05 yesterday. The US currency was also higher against the Australian dollar, the British pound and the South African rand. The New Zealand dollar, the world's biggest mover, slumped 1.3% today. The Fed kept its target overnight lending rate between banks at 5.25% since August, after two years of rate increases. Interest-rate futures indicate the odds of a quarter-percentage-point rate cut by March were 17% yesterday, down from 23% on December 27. The National Association of Realtors will say at 10:00 a.m. in Washington that contracts to buy previously owned homes in the US rose 0.8% in November after falling 1.7% in October, according to a Bloomberg News survey.

Orders placed with US factories gained 1.3% in November, after declining 4.7% the previous month, a separate Bloomberg survey showed. The Commerce Department releases the data at 10:00 a.m. in Washington. „US economic indicators are becoming stronger,” said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. „This will support the dollar.”
The Institute for Supply Management yesterday said its manufacturing index rose more than expected by economists, to 51.4 in December from 49.5 in November. A reading above 50 signals expansion. Several Fed officials judged that „the downside risks to economic growth in the near term had increased a little” in minutes of the December policy meeting. „All members agreed that the risk that inflation would fail to moderate as desired remained the predominant concern,” the Federal Open Market Committee said.

The euro remained lower against the dollar and yen as a report today from Eurostat, the European Union's statistics agency, showed consumer prices rose 1.9% from a year earlier in December, matching the rise the previous month. That is the fourth month that inflation has been below the 2% target the Frankfurt-based central bank sets for consumer prices in the 13 nations that share the euro.
The ECB has raised borrowing costs six times in a year, to 3.5%. The central bank next meets on January 11. „This is just a temporary punctuation of what is a reestablished downtrend in the dollar generally,” said Adam Cole, senior currency strategist in London at RBC Capital Markets. „I think we go back to retest the old highs at around $1.37.”

The yen may decline on speculation Japanese investors will keep buying higher-yielding assets abroad, even after the Yomiuri newspaper January 1 said the Bank of Japan may raise interest rates this month. Japan's 0.25% lending rate is the lowest among major economies. „The yen will likely weaken,” said Shuichi Kato, head of currency and proprietary trading in Tokyo at Itochu Corp. „Although Japan's rates may rise, it'll take a while for the BOJ to lift them higher. There are a lot of people who will probably invest in foreign assets. People with money want to have yield.”

Domestic investors bought more foreign bonds than they sold for a second month in November, with net purchases of ¥885.4 billion ($7.41 billion), according to figures from the Ministry of Finance in Tokyo. The BOJ kept its key overnight lending rate unchanged on December 19, after raising it in July for the first time in almost six years, with policy makers saying they want to gather more data on consumer spending and inflation. Investors today see a 75% chance the BOJ will raise rates this month at its January 17-18 meeting, up from 69% the previous day, according to a Credit Suisse Group report based on contracts for the exchange of interest payments. (Bloomberg)