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Thu 18 Aug 2011 11:20 AM

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Dollar gains as shares drop before US inflation data

Latest data may dampen hopes for fresh liquidity injections by US Fed to boost equity markets

Dollar gains as shares drop before US inflation data
US dollar and euro currency

The dollar and yen gained against most major counterparts on
prospects a report on Thursday will show that US inflation isn’t weak enough
for the Federal Reserve to consider a third round of so-called quantitative
easing.

The yen rose against the Australian and New Zealand dollars
as Asian equities fell, damping demand for higher-yielding assets. The Fed wrapped
up its second round of bond buying, known as QE2, in June. The franc fell
against the euro and dollar on speculation the Swiss National Bank will expand
efforts to curb the currency’s strength. The pound depreciated versus the
dollar before spending data that may add to evidence the UK economy is losing
momentum.

“If inflation comes in around consensus, it’s really hard to
make the case for QE3 near term,” said Sean Callow, a senior currency
strategist at Westpac Banking Corp. in Sydney. “It makes it harder for the Fed
to ease monetary policy further and so is supportive for the US dollar.”

The dollar rose to $1.4398 per euro as of 7:05 am in London
from $1.4426 in New York on Wednesday. It was at 76.66 yen from 76.60, near the
post-World War II record low of 76.25 yen reached on March 17. The 17-nation
euro traded at 110.34 yen from 110.50 on Wednesday.

The Australian dollar fell 0.5 percent to $1.0496 and
declined to 80.47 yen from 80.82 on Wednesday. New Zealand’s currency weakened
to 83.29 U.S. cents from 83.74, and lost 0.5 percent to 63.85 yen.

US consumer prices, excluding volatile food and fuel costs,
climbed 0.2 percent in July, according to a Bloomberg News survey of
economists. The gauge added 0.3 in each of the previous two months, the biggest
back-to-back gain in three years.

With the economic recovery showing signs of stress, the Fed
on August 9 pledged to keep its benchmark interest rate at a record low at
least through mid-2013. Charles Plosser and Richard Fisher, two Fed officials
who dissented from the central bank’s latest policy statement, on Wednesday
spoke out against unnecessary stimulus. Fisher also said monetary easing
shouldn’t be used to boost stocks.

The CPI data may dampen expectations for “fresh liquidity
injections to boost equity markets, so it’s potentially a negative for equities,”
said Callow.

US Labour Department data that will show the number of
applications for unemployment insurance payments in the US climbed 5,000 in the
week ended Aug. 13 to 400,000, according to economists in a Bloomberg survey.

The MSCI Asia Pacific Index of stocks dropped 1.4 percent.

The yen has risen beyond the level that prompted Japan to
unilaterally sell the currency on August 4, its first intervention in currency
markets since March.

Japan’s Finance Minister Yoshihiko Noda warned on August 14
he’s ready to take “bold action” to stem a yen advance that risks slowing the
nation’s recovery. Takehiko Nakao, a senior currency official at the Finance
Ministry, said he discussed foreign-exchange issues on Thursday with Bank of
Japan Executive Director Hiroshi Nakaso. Nakao declined to comment on whether
they discussed intervention in the currency market.

“Upward pressure for the yen still remains,” said Tsunemasa
Tsukada, chief manager for currencies and financial products in Tokyo at
Mitsubishi UFJ Trust & Banking Corp, a unit of Japan’s largest financial
group by market value. “The yen may strengthen further should the market
consensus come to say there will likely be a recession in the US and European
economies.”

The franc fell against the euro amid concern Switzerland’s
central bank will expand efforts to weaken its currency to protect exporters.
The SNB said on Wednesday it will boost liquidity to the money market. Swiss
Finance Minister Eveline Widmer-Schlumpf said any decision on a target for the
currency is up to the central bank.

“The SNB played its cards pretty close to its chest on
Wednesday and hasn’t ruled out intervention,” said Sue Trinh, a senior currency
strategist at Royal Bank of Canada in Hong Kong. “The market will still be on
intervention alert, especially with the Japanese on Thursday talking about the
strong yen.”

The franc fell to 1.1461 per euro from 1.1398 on Wednesday,
when it gained 0.6 percent. It slid 0.8 percent to 79.62 centimes per dollar.

The franc and the yen tend to strengthen during periods of
financial stress because their export-reliant economies don’t need foreign
capital to balance current accounts -- the broadest measure of trade. The
dollar benefits as the world’s reserve currency.

The franc has advanced 9.2 percent over the past three
months, the biggest gainer among 10 major-economy currencies tracked by
Bloomberg Correlation-Weighted Indexes. The yen has risen 4.6 percent and the
dollar is down 2.5 percent.

The pound ended a five-day rally against the dollar before a
report forecast to show UK retail sales rose in July at a slower pace. Sales
including fuel rose 0.3 percent from June, when they gained 0.7 percent, the
Office for National Statistics will report, according to the median estimate of
economists surveyed by Bloomberg.

Bank of England policy makers Spencer Dale and Martin Weale
ended their push for an interest-rate increase this month, according to minutes
of the Aug. 3-4 meeting published on Wednesday. The nine-member Monetary Policy
Committee voted unanimously to hold the key rate at a record-low 0.5 percent.
Adam Posen continued to vote for a £50bn ($83bn) expansion of the UK central
bank’s quantitative- easing program.

“Our economists think more QE is coming, and the
anticipation rather than the actuality is where pound could feel the most
pain,” BNP Paribas strategists including Ray Attrill in New York wrote in a
note to clients.

The pound fetched $1.6523 from $1.6543.

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