FOREX - Dollar holds steady ahead of Fed

LONDON, Nov 3 2009 (Reuters) - The dollar held steady on Tuesday before the start of the U.S. Federal Reserve's policy-setting meeting, while the Australian dollar fell after its central bank raised rates but took a cautious stance going forward.
Falls in European share prices also supported the dollar, which has a tendency to gain when investors shed risk assets. Movements in the foreign exchange market were further dulled because Tokyo markets were closed for a national holiday.
The dollar fell as stocks gained the previous day after data showed a pick-up in manufacturing activity round the globe, but later lost some ground on concerns about the banking system.
Sterling tumbled against the dollar on Tuesday when details were published of a shake-up of some government-acquired banks.
Shares in Royal Bank of Scotland (RBS.L) fell some 5 percent in early trade after it agreed to sell off some businesses. [ID:nL3540088]
In contrast, Lloyds Banking Group (LLOY.L) stocks rose some 2 percent after it said it would launch a record 13.5 billion pound ($22 billion) rights issue.
But UK and European shares were down 1.0 percent in early trade. A poor performance from UBS also weighed on shares.
At 0725 GMT, the pound was at $1.6308 GBP=D4, down 0.5 percent on the day, after falling to a one-week low of $1.6292.
A dearth of major economic data during European hours will likely leave traders taking their cue from stock markets. But they remain wary -- as well as the Fed, the European Central Bank and the Bank of England will also hold policy meetings this week. [ECB/INT] [BOE/INT]
The Fed is expected to keep its benchmark interest rate unchanged near zero, where it has been since December. The focus is on how policymakers will represent future options, but many analysts say the Fed is unlikely to change the wording of keeping rates low for an "extended period."

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Don’t write off the dollar

By Donald Rissmiller

The bear case for the dollar may be well-known, but there are a number of reasons why it seems too early to bet on a collapse in the US currency in 2010, says Donald Rissmiller, chief economist at Strategas Research.
First, he says, as long as floors remain in housing and consumer confidence, the US economic recovery is sustainable. “Confidence eased slightly in October but remains above its recent low,” he notes.
Second, he believes the saving/investment equation is not yet sufficiently imbalanced to suggest a dollar crisis is imminent.
Furthermore, the debt-to-GDP ratio remains below the 100 per cent level typically considered problematic. “While there has been some talk of an eventual US debt downgrade, the timeframe still appears to be several years away.”
Mr Rissmiller also argues the Federal Reserve will raise interest rates, while employing tools such as paying interest on reserves, leaving its balance sheet elevated. “There’s a lot of room for tighter US monetary policy before policy becomes ‘tight’,” he says.
Also, foreign central banks could intervene in support of the dollar, given the global push for exports as a solution to the economic downturn.
Finally, pegged and semi-pegged currency countries, such as China, have little incentive to disrupt the current trade system. “Without inflation in developing Asia, there’s little need to make drastic changes now,” he says.

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Dollar ‘Downtrend’ May Be Continuous for Some Time

By Daniel Tilles , 2009 Oct. 14 (Bloomberg)

The dollar’s decline may persist amid speculation the Federal Reserve won’t need to raise interest rates for some time, according to Royal Bank of Scotland Group Plc.

Comments yesterday from Fed Vice Chairman Donald Kohn feel “like a slap-down of the recent rash of more hawkish rhetoric,” Greg Gibbs, a foreign-exchange strategist in Sydney, wrote today in a report. “It reads to me like, sure we can raise rates and quickly if we have to, but we are very unlikely to have to, at least for a long time.

‘‘Such sentiments at the core of policy making at the Fed suggest the dollar downtrend will be broad and continuous for some time yet.’’

The dollar fell today against 15 of the 16 most-traded currencies, dropping 0.2 percent to $1.4883 per euro as of 7:30 a.m. in London.

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