Philadelphia Fed President Reduces Heat On Dollar

Peter Garnham
Financial Times
Thursday September 27, 2007

The dollar pulled back from a record low against the euro on Wednesday as hawkish comments from a Federal Reserve official gave the beleaguered greenback some respite.

The dollar fell to a fresh all-time low against the single currency for the fifth consecutive session, hitting $1.4162 early in Asia trading.

But analysts said comments from Charles Plosser, Philadelphia Federal Reserve president, helped stem the tide of dollar selling.

Mr Plosser said it was a mistaken perception that the Fed had changed its policy approach, and that US interest rates would have to be adjusted if inflation picked up. He added that the recent Fed rate cut “runs the risk” of higher future inflation.

By midday in New York, the dollar rose 0.2 per cent to $1.4125 against the euro, climbed 0.4 per cent to SF1.1705 against the Swiss franc and gained 0.2 per cent to $2.0150 against the pound.

Mansoor Mohi-uddin at UBS said last week’s aggressive 50 basis point interest rate cut from the Federal Reserve had reinvigorated markets around the globe, easing heightened levels of risk aversion sparked by the recent turmoil on the world’s credit markets.

“Paradoxically, it may have made it easier for other central banks to continue with their tightening cycle, putting downward pressure on the dollar via yield differentials,” he said.

Indeed, the Norwegian central bank raised interest rates by 25 basis points to 5 per cent on Wednesday, a move that had the market split down the middle in the run-up to the decision. The krone rose 0.2 per cent to Nkr7.7760 against the euro.

Meanwhile, the rebound in risk appetite put the low-yielding yen under pressure. It fell 0.7 per cent to Y115.55 against the dollar, lost 0.6 per cent to Y163.22 against the euro and dropped 1 per cent to Y86.10 against the New Zealand dollar.

The pound endured a volatile session, falling to a low of £0.7029 against the euro, its weakest level since January 2005, as worries over the health of the UK financial system continued.

But the pound rallied later to stand flat at £0.7005 against the single currency after the Bank of England announced it had received no bids for its £10bn auction of three-month funding, easing some concerns over liquidity problems in the UK money markets.

Elsewhere, the Saudi riyal fell 0.2 per cent to SR3.7400 against the dollar after the Saudi central bank said it had no plans to alter the currency’s SR3.75 peg against the greenback.

However, Gabriel Stein at Lombard Street Research said it was unlikely that speculation over a possible revaluation of the riyal would evaporate.

“The underlying problems cause by the peg – accelerating inflation fuelled by domestic overheating as well as by imported inflation – remain,” he said.