*

Hitt og þetta 11. október 2006

DJ Forex Focus: Dollar Still Seen Rising, But Slowly

By Nicholas Hastings

A DOW JONES NEWSWIRES COLUMN

LONDON (Dow Jones)--By most measures, the dollar should continue rising.

Both economic data and official comments out of the U.S. later this week are expected to confirm the view that U.S. rates won't be cut for a while yet, especially now that crude oil prices are coming back down again.

Meanwhile, concern over developments in North Korea should ensure that the currency remains popular as a safe haven.

However, some analysts question just how long the dollar will continue to benefit from carry trades, especially now that speculative short positions in the dollar appear to have been largely eliminated.

Callum Henderson, head of foreign-exchange strategy at Standard Chartered Bank in Singapore, reckons that while the dollar may still have some further upside, "this could be an excellent opportunity to renew short dollar exposure."

His view, though, is hardly mainstream.

"Low volatility and more stability in U.S. yields could help a dollar carry rally continue," said Trevor Dinmore, a currency strategist with Deutsche Bank in London.

He feels that, if anything, the dollar can benefit now that major event risks such as the recent pause in Federal Reserve rate moves and the meetings of the Group of Seven leading industrial nations have passed with little damage being inflicted on dollar sentiment.

Mansoor Mohi-uddin, chief currency strategist with UBS in London, noted that his bank's monitor of flows last week "showed the strongest week of euro/dollar selling...since our data series began in 2001."

"While investors continue to shrug off risk events like the demise of hedge funds and announcements of nuclear testing, carry trades will stay supported and the higher yielding dollar will remain resilient," Mohi-uddin said.

There is certainly little reason to believe that the Fed will be rushing to reduce U.S. interest rates any time soon.

Former Fed Chairman Alan Greenspan provided some reassurance on that score by noting that the worst of the recent U.S. housing slowdown appears to be coming to an end.

St. Louis Fed President William Poole also suggested that the Fed doesn't need to react to any further signs of an economic slowdown now given the decline in long-term rates that has been achieved.

Meanwhile, evidence that the fourth quarter may well prove more robust than the third quarter is expected to start to roll in with data Friday. Retail sales are expected to have risen 0.3% last month, a bit more than the 0.2% increase the month before.

The University of Michigan consumer confidence reading is also expected to be stronger - with the main index rising to 86.5 this month from 85.4 in September.

Daragh Maher, a senior currency strategist with Calyon Corporate and Investment Bank in London, suggested that lower energy prices - with the price of crude falling back to about $60 a barrel now from nearly $80 a barrel only a matter of weeks ago - could play a major role in helping the economy.

"Lower gasoline prices probably provided a boost to consumer confidence both through their positive impact on spending power but also indirectly through higher stock market prices," Maher said.

He also sees a lower oil import bill helping to narrow the U.S. trade deficit - another plus for the U.S. currency.

"The drop in energy prices will probably also feature as a point of discussion in both the Beige Book and the FOMC (Federal Open Market Committee) minutes," the Calyon strategist added.

If so, then the minutes and the Beige Book Wednesday should both reflect the impression that there is no need for the Fed to rush into early rate cuts.

"The dollar will remain in demand for now as this week's U.S. release calendar is unlikely to change the market's soft landing perception," said Hans Redeker, global head of foreign-exchange strategy at BNP Paribas in London.

But, as Standard Chartered's Callum warns, the level of interest rates may not prove so important in supporting the dollar now. The U.S. currency may have already risen to levels where momentum will wane.

"There is an increasing disconnect between the dollar on the one hand and short-term interest rates on the other," Callum said, suggesting that this could limit any further dollar gains.

He also points to the recent data showing that net dollar short positions against the other six major currencies - the euro, yen, pound, Swiss franc and the Canadian and Australian dollars - have flipped to a small net long.

"There is now much greater potential for renewed dollar weakness going forward," he said.

Derek Halpenny, senior currency economist with Bank of Tokyo-Mitsubishi in London, is particularly concerned about the dollar's limited upward potential against the yen, given that the U.S. currency is now close to levels that might become uncomfortable for the authorities.

He noted that having broken its high for the year at Y119.40, this will bring the December 2005 high of Y121.40 back into play.

"With the psychologically important Y120 level in between, it suggests the upside for dollar/yen will be slow-going from here," Halpenny said.

The market's reluctance to push the dollar over Y120 was evident early Wednesday as the dollar backed down from close to that level after rallying on fears that North Korea had conducted a second nuclear test. In the event, it appears that this was confused with a small earthquake off the coast of Japan.

The market also seemed keen to buy the yen back on reports that North Korea may actually have botched the test over the weekend. If true, this would reduce the country's bargaining power and help ease some of the geopolitical tensions in the region that have been undermining the Japanese currency.

At 0645 GMT, the dollar is trading at Y119.65, down from Y119.76 late Tuesday in New York, according to EBS. The euro is down at Y149.96 from Y150.10 but is trading almost flat at $1.2534 compared with $1.2536.

Bloomberg TNI FRX POV

Reuters USD/DJ
Telerate 1066 or 1074

Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 15 years. Apart from his written commentary and analysis, he also appears on CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)

(END) Dow Jones Newswires

October 11, 2006 03:15 ET (07:15 GMT)

Copyright (c) 2006 Dow Jones & Company, Inc.