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Dollar rebounds from two-ear low versus euro on rate outlook - extended

The dollar rose from a two-year low against the euro and advanced versus the yen as traders speculated a day after the Federal Reserve revised its interest rate outlook that it won't lower borrowing costs soon.

The US currency dropped yesterday after the central bank removed a previous reference in its statement to „additional firming,” signaling it's open to either lowering or raising interest rates. A government report today showed jobless claims unexpectedly dropped last week, indicating labor market strength. „There are second thoughts about the statement,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc. „Talk about rate cuts is still way off. This gives the dollar some support in the short term.” The US currency rose to $1.3363 per euro at 10:50 a.m. in New York, from $1.3411 earlier, the weakest since March 2005, and from $1.3385 yesterday. It also rebounded from 80.88 cents per Australian dollar, the weakest in 10 years, and a six-week low of $1.9727 per British pound.

The dollar's advance against the euro stalled after a closely watched gauge of the future direction of the US economy fell the most in a year last month. The Conference Board's index of leading economic indicators dropped 0.5% after a 0.3% decline in January, initially reported as a gain, the New York-based group said today. The gauge points to the direction of the economy over the next three to six months. „This definitely put the dollar under pressure,” said Boris Schlossberg, senior currency strategist in New York at DailyFX.com. „The worry is that we are starting to see the housing problem is seeping into consumer spending, which is negative for the US economy.”

The British pound gained against the euro and the yen after a report showed sales at UK retailers rebounded more than expected last month, adding to speculation the Bank of England will keep raising interest rates from 5.25% this year. The yen weakened against the dollar, the pound and the New Zealand currency today after a global stock rally encouraged investors to return to the so-called carry trade by buying higher-yielding investments funded by yen-denominated loans. The Japanese currency fell to 117.72 per dollar from 117.54. Japan's borrowing cost, at 0.5%, is the lowest among major economies. It compared with 6.25% in Australia and a record 7.25% in New Zealand. Europe Central Bank's rate is 3.75%. Bank of Japan Governor Toshihiko Fukui said today before a parliament committee in Tokyo that the central bank will keep rates low for some time and adjustments need to be gradual.

The Fed yesterday kept its benchmark interest rates at 5.25%, the highest since 2001, and said that future policy adjustments will depend on „the evolution of the outlook for both inflation and economic growth.” Inflation is the „predominant” concern, while recent economic indicators have been „mixed” and the „adjustment” in the housing industry is continuing, it said. Governor Randall Kroszner will speak today at the Fed Bank of Richmond, along with its President Jeffrey Lacker. Fed chairman Ben Bernanke didn't comment on the economy or interest rates in brief comments at a Washington conference today. „What we'll need to see is the tone of comments from policy makers,” said Jeremy Stretch, a senior currency strategist in London at Rabobank. „The Fed has taken baby steps. It doesn't imply we're going to see a rate cut coming very soon.”

First-time claims for jobless benefits in the US unexpectedly fell to 316,000 for the week that ended March 17 from a revised 320,000 the previous week, the Labor Department reported today. The median forecast of 39 economists surveyed by Bloomberg News was for a total of 323,000. The unemployment rate fell to 4.5% last month, approaching the five-year low 4.4% reached in October. „The market reconsidered what the Fed really meant,” said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. „The Fed didn't send any different signal. They still warned of the risk of inflation.” Futures contracts today showed a 44% chance the Fed will cut the rate target for overnight loans between banks a quarter-percentage point to 5% at its June 28 meeting, compared with 52% odds yesterday. (Bloomberg)