Fed Decision – Dollar Raises as Oil Slumps

* Dollar index at seven-week highs before Fed decision
* Aussie dollar slides as RBA paves way for rate cut
* Oil prices tumble (Adds reaction to ISM, updates prices)
By Vivianne Rodrigues
NEW YORK, Aug 5 (Reuters) – The dollar jumped to a six-week high versus the euro on Tuesday as the price of crude oil slumped and investors awaited a Federal Reserve announcement in which policy-makers may indicate concern about inflation.
The drop in oil helped quell fears high energy prices will continue to weigh on the U.S. economy at a time consumer prices are showing an unexpectedly fast rise.
“Despite the Fed and the ECB meetings this week, oil is really becoming the short-term focus in the foreign exchange markets,” said Omer Esiner, a currency analyst at Ruesch International in Washington, D.C. “It is really helping push the dollar up.”
In midday trading in New York, the euro was down 0.7 percent on the day at $1.5459, having traded as low as $1.5457, according to Reuters data. It was the first time the euro zone common currency had traded below $1.55 since June.
Oil fell to a three-month trough of $118 per barrel while metals and other commodity prices dropped further as concern over slowing global demand sparked profit-taking.
The dollar index, which measures the U.S. currency’s performance against a basket of six currencies, climbed as high as 73.943, its highest since mid-June.
Esiner said a further drop in crude prices and a hawkish statement by the Fed at Tuesday’s meeting may help push the euro to $1.5430. A close below that may pave the way for a further decline to $1.5400, he said.
“Those are the next two key levels on euro/dollar,” Esiner said. “Today’s Fed statement may help push the currency through those levels.”
The Fed is widely expected to keep benchmark interest rates at 2.0 percent and highlight concerns on inflation and widening losses in the U.S. financial system. The European Central Bank is also expected to leave rates unchanged at 4.25 percent at its meeting on Thursday.
U.S. government data on Monday showed an unexpected surge in consumer prices in June.
Another report on Tuesday showed the U.S. service sector shrank slightly in July but by less than economists had expected.
“The ISM non-manufacturing index was a little better than expected,” says Vassili Serebriakov, currency strategist at Wells Fargo. “This index indicates that the economy is marginally in contraction territory. But the reaction of the FX market was fairly muted ahead of the Fed decision.”
Soft economic data from the euro zone helped keep selling pressure on the euro. A report showed June retail sales in the euro zone fell more than expected.
The euro fell 0.8 percent against the yen to 167.35 yen. The dollar was little changed against the Japanese currency at 108.23 yen.
The upside in the single currency remains limited amid deteriorating growth conditions in the euro zone, analysts at UBS AG said in a note. “With the economic slowdown progressing more rapidly than the (ECB) Governing Council expected, a shift to a downside is possible and this will hurt EUR/USD further,” the bank said.
CENTRAL BANK MEETINGS
The Australian dollar was among the weakest performers on Tuesday. The Reserve Bank of Australia kept interest rates at 7.25 percent but sent a strong signal it will ease soon as tighter credit conditions and slowing demand should cool inflationary pressures.
“The RBA has clearly signaled its intent to cut rates and the market understands it to mean a move at the next meeting in September,” currency strategists at Brown Brothers Harriman in New York said in a note.
The Australian dollar was down more than 1 percent at $0.9175. Investors sold the Aussie against a host of currencies, particularly the low-yielding yen, which also benefited from buying against the euro and sterling.
The RBA’s rate decision began a week of major central bank rate decisions. The U.S. Fed announces its decision around 2:15 p.m. (1815 GMT) on Tuesday. The ECB and Bank of England will both announce their rate decisions on Thursday. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)
Source: Guardian.co.uk