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Dollar Gains for Second Week Against Euro, Reaches 9-Month High

June 11 (Bloomberg) -- The dollar gained a second straight week against the


euro, reaching a nine-month high, as remarks by Federal Reserve Chairman Alan Greenspan bolstered expectations the central bank will keep raising its benchmark interest rate.
The U.S. economy is on a ``reasonably firm footing,'' Greenspan said June 9. Demand for the dollar also rose after government data yesterday showed a smaller-than-forecast U.S. trade deficit, pushing up the dollar to its biggest daily gain of the week.

``As long as the Fed continues to hike even in a measured way, we'll see the dollar supported,'' said Naomi Fink, a currency strategist in New York at BNP Paribas SA. ``It's hard to see that the euro will regain support'' until the Fed pauses in its rate increases or euro-region growth improves, she said.

Against the euro, the dollar advanced 1 percent this week to $1.2120 at 5 p.m. yesterday in New York, according to currency- dealing system EBS. After the trade report yesterday, the dollar reached $1.2107 per euro, the strongest since Sept. 8. The dollar rose 0.9 percent for the week to 108.67 yen.

Greenspan also said policy makers can continue to raise borrowing costs. The Federal Open Market Committee has increased its benchmark rate in eight straight quarter-percentage point steps in the past year, to 3 percent.

The U.S. April trade deficit of $57 billion, the amount by which imports exceeded exports, rose from $53.6 billion in March, Commerce Department data showed. The median forecast in a Bloomberg News survey was for a $58 billion gap; the March deficit was less than the government's earlier $55 billion estimate. The deficit was a record high of $60.6 billion in February.

`Less Bearish'

A smaller-than-forecast deficit means fewer dollars have to be sold for other currencies to pay for U.S. imports. The report pushed the dollar's gain this year to 11.9 percent against the euro and led investors to exit bets on dollar losses, said traders including John McCarthy at ING Financial Markets LLC.

``People are certainly becoming bearish on the euro and far less bearish on the U.S. dollar,'' said John McCarthy, a director of currency trading in New York at ING Financial Markets LLC. As the dollar rallied today, ``they just had to throw in the towel'' and buy. Until this year, the dollar fell three straight years through 2004, by a total of 34 percent.

The dollar dropped the past three years through December against the euro and yen in part because the trade gap expanded to records.

`Stabilizing' Balance

``We actually see a lot of positives'' for the dollar in the trade numbers, said Robert Sinche, bank's head of currency strategy at Bank of America Corp. in New York. ``We're now getting signs the trade balance is stabilizing.'' He expects the dollar to rise to $1.18 per euro in the third quarter.

As the trade gap improves, it also leaves investors focusing more on the prospect for U.S. benchmark interest rates to rise relative to those in Europe, Sinche said.

The U.S. currency has climbed about 5.8 percent versus the yen this year as the Fed lifted its target interest rate, while the Bank of Japan kept borrowing costs near zero and the European Central Bank left its benchmark at 2 percent.

Ten-year U.S. Treasury note yields were the highest in two months relative to those on similar-maturity German government debt. At 4.05 percent, U.S. 10-year note yields rose to the highest this month, and about 0.92 percentage point above yields on German bunds of the same maturity.

Lure of Higher Rates

``Interest-rate differentials are beneficial for the dollar,'' said Richard Yetsenga, a currency strategist in Hong Kong at HSBC Holdings Plc. ``Greenspan said rates are going to continue to go up and the economic outlook is favorable.''

HSBC this week joined JPMorgan Chase & Co. and Morgan Stanley in raising its dollar forecast. HSBC now predicts the dollar will trade at $1.24 per euro by the end of June, from a previous prediction of $1.32.

The yield on the September Eurodollar futures contract rose about 0.11 percentage point this week to 3.81 percent, suggesting traders expect the Fed will increase its target to at least 3.5 percent this year from 3 percent now. The futures settle at a three-month lending rate that has averaged 0.21 percentage point more than the Fed's target the past 10 years.

Fed policy makers will raise the rate by another quarter- point when they next meet on June 29-30, according to the median forecast of economists surveyed by Bloomberg.


To contact the reporter on this story:Mark Tannenbaum in New York at [email protected]Last Updated: June 11, 2005 08:20 EDT