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Dollar Cuts Gains as Fed Drops Accommodation Phrase
Reuters, December 13, 2005
NEW YORK (Reuters) - The dollar pared gains on Tuesday after the Federal Reserve raised interest rates as expected but dropped the reference to "accommodation" in its statement, which hinted to some currency investors that the central bank was nearing the top of its tightening cycle.
But analysts said the dollar's slip was muted because the Fed also signaled that some more rate rises were still to come.
"The dollar initially weakened. They did take out the word accommodation but said further measured policy firming is likely," said Tim Mazanec, director and senior currency strategist with Investors Bank & Trust in Boston.
"When everybody has had time to read the statement they will realize that there is at least another rate hike and likely more to come, so we are not done yet," Mazanec added.
The Fed raised the benchmark federal funds rate for the 13th consecutive time, increasing it by 0.25 percentage point to 4.25 percent, as widely expected.
In its policy statement, the Federal Open Market Committee (FOMC) said that "some further measured policy firming is likely to be needed".
The euro climbed to test five-week highs around $1.1985 according to Reuters data from around $1.1930 shortly before the announcement and up about 0.2 percent from levels late on Monday. It later eased back to $1.1954, flat against the dollar.
Against the yen the dollar slipped to around 119.74 yen, from around 120.15 yen shortly before the announcement. It later edged higher to 119.93, up 0.23 percent on the day.
"Their comment that 'some measured policy firming is likely' suggests that there is going to be a much more wait-and-see attitude depending on how the U.S. data come in," said Brian Dolan, director of FX research with Gain Capital in New Jersey.
"They used that 'measured pace' language to indicate that they may or may not go (raise rates) next meeting. The next rate hike is likely to be the last. This is certainly having a negative impact on the dollar."
On Monday, the dollar had fallen sharply on concerns the Federal Reserve might be about to signal the end of its cycle of interest rate rises which started in June 2004.
Such a hint was expected to weigh on the dollar and give a boost to currencies that may have higher interest rates in the near term, analysts said.
Steadily rising U.S. interest rates have boosted the dollar's allure during 2005 to investors seeking higher yields, and helped the U.S. currency gain some 15 percent against the euro and some 17 percent against the yen.
But currency analysts warn that once the Fed reaches the peak of its monetary tightening cycle the dollar may lose ground as currency investors start to favor countries where other central banks are raising rates.
Earlier on Tuesday traders largely ignored economic data, including a weaker-than-expected November U.S. retail sales report.
Retail sales rose 0.3 percent in November, short of analysts' expectations of a 0.5 percent increase. But analysts say that was in large part due to valuation effects of falling gasoline prices.
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