Dollar flat as traders eye central banks
Currency market hunkers down to await trio of decisions on interest rates
By William L. Watts, MarketWatch
Last update: 7:04 a.m. EDT Aug. 4, 2008Comments: 2LONDON (MarketWatch) -- The dollar traded narrowly mixed Monday, showing little direction as the foreign-exchange market prepares for interest-rate decisions from the Federal Reserve, the Bank of England and the European Central Bank.
The dollar index (DXY:US Dollar Index Future - Spot Price DXY 73.43, +0.01, +0.0%) , a measure of the greenback against a trade-weighted currency basket, was virtually unchanged at 73.394.
The euro temporarily extended early gains against the dollar after the statistical agency Eurostat said industrial producer prices across the euro zone rose at an annual rate of 8%, the highest since the statistical series began in 1990. Excluding surging energy prices, PPI rose at a 4% annual pace.
"With a whole raft of interest-rate verdicts due from the U.S., the U.K. and the euro zone later this week, any metric that relates to inflation certainly has the potential to carry the real momentum," said Gary Thomson, head of sales trading at CMC Markets.
All three of the central banks are expected to leave rates unchanged -- the Fed on Tuesday, and the Bank of England and the European Central Bank on Thursday.
"Any clues as to where the respective monetary policies go next may well be jumped upon by traders," Thomson said.
The euro-zone PPI data, not usually a major market mover, had little lasting impact.
One euro fetched $1.5580 in recent trading, up from late Friday's North American trade near $1.5565.
The dollar bought 108.06 Japanese yen, up from 107.59 yen, and changed hands at 1.0479 Swiss francs, down from 1.0497 francs.
The British pound stood at $1.9682, down from $1.9753. The euro rose to 79.11 pence, up from 78.67 pence.
The dollar gained ground against the euro last week, partly due to a renewed focus on slowing growth prospects -- and the possibility of recession -- for the 15-nation euro zone. See earlier story.
Dog days
Strategists at BNP Paribas said the euro might be due for a short-lived rebound.
They said that the single currency's expected to bounce back to 1.5650 to $1.5680 but that should then be viewed as a selling opportunity.
With the region's economic prospects up in the air, Jean-Claude Trichet, president of the European Central Bank, isn't likely to issue hawkish rhetoric at his monthly news conference following Thursday's rate meeting, observers said.
European economic data are likely to remain on the soft side this week, with June euro-zone retail sales set for release Tuesday, German factory orders on tap for Wednesday and industrial production data for Germany, France and Italy expected Thursday and Friday.
Pound's correlation to U.K. banks
The pound was under pressure as banking giant HSBC Holdings said first-half net profit fell 29% to $7.72 billion, due to higher loan-impairment charges and other credit-risk provisions. See full story.
Nervousness over the banking sector is likely to keep a lid on sterling this week, said strategists at Lloyds TSB. Barclays and Royal Bank of Scotland Group are scheduled to report financial results on Thursday and Friday, respectively.
"The high correlation of sterling with banking stocks implies that earnings results from HSBC, Barclays and RBS may have a decisive say over the next move in sterling, provided that the BOE does not spring a surprise on Thursday," they wrote.
The Bank of England's rate-setting Monetary Policy Committee is widely expected to leave its key lending rate unchanged at 5%, though "it is not inconceivable that interest rates could be either raised or cut," said Howard Archer, chief European economist at Global Insight.
Archer noted that July's meeting of the nine-member MPC saw a three-way split, with a majority voting to hold steady while one member backed a hike and another supoported a rate cut. Read about the July rate decision.
"The general view seemed to be that the July MPC minutes were on the hawkish side, and that if the Bank of England does move interest rates in the near term, it will be more likely to raise them rather than cut them," he said.
The Fed, meanwhile, is expected to keep its key lending rate unchanged at 2% on Tuesday.
However, U.S. policymakers are seen as likely to alter the central bank's statement to indicate that a weak economy is the biggest worry in the short run while inflation risks remain elevated. See full story.
William L. Watts is a reporter for MarketWatch in London.
News 
Market Data 
Discover 
