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Dollar Trades Mixed After Wholesale Inflation Rises More Than Expected

Reuters
Thursday, 15 Mar 2007 | 9:11 AM ET

The dollar was little changed against the euro and yen, after U.S. stock futures declined following data showing higher than expected U.S. wholesale inflation in February.

The euro rose slightly against the dollar from $1.3215 where it was prior to the data.

The dollar fell against the yen, down from 117.40 yen before the report was released.

The dollar has been tightly tracking U.S. stock prices after a surge in risk aversion more than two weeks ago sent global equity prices tumbling and the yen climbing.

Sharp falls in equity markets had curbed risk appetite and made currency investors less keen to borrow low-yielding currencies like the yen to fund investments in higher return units such as sterling or the dollar.

Now, a recovery in shares has prompted some to go back into carry trades, which still look attractive from a yield perspective with Japanese rates at just 0.5% compared with 5.25% in Britain and 7.5% in New Zealand.

"Everything is tracking stocks right now, pretty much tick-for-tick," Ardash Sinha, currency strategist at Barclays Capital, said.

"In that sense local market fundamentals are taking a back seat. I think we'll see more trade on what's happening in equities pretty much until the CPI tomorrow (at 1230 GMT)," he added.

European stocks rose about 1.5% after similar gains in Tokyo's Nikkei index overnight and advances on Wall Street on Wednesday.

Sterling, which had been a key beneficiary of carry trades and has therefore suffered more than some of the other currencies during their unwinding, was up 0.2% against the yen.

Troubled Waters

European Central Bank Governing Council Member Axel Weber attempted to soothe troubled market waters, saying that while the recent financial market correction was a timely reminder of the risk of foreign exchange carry trades, it should not be dramatized.

Analysts said central banks would be worried if the unwind gathered momentum. "They would be concerned if this became disorderly and we saw a complete unwind," Sinha said.

Fellow Governing Council member Klaus Liebscher said that euro zone monetary policy remained relaxed given strong economic growth and that he saw inflationary risk rising towards the end of this year.

Governing Council member Nicholas Garganas said the bank was determined to act promptly to monitor price stability. The ECB is expected to raise rates to 4 percent in coming months.

Thursday features two central bank decisions, with the Norges Bank expected to raise rates to 4% and the Swiss National Bank seen hiking to 2.25%, both at 8:00 a.m. New York time.

"A combination of weak activity and high inflation data is probably the worst outcome for equities and related high beta markets such as emerging market currencies," BNP Paribas said in
a research note.

Investors will also be looking for any more news from U.S. subprime mortgage lenders, as they are worried that trouble in that sector could spill out into the wider housing market.

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