Dollar Gains Versus Euro As Fed Minutes Show Inflation Concern

The dollar rose to a seven-week high against the euro as minutes from the Federal Reserve's last meeting reiterated policy-makers' view that inflation remains a top concern.

The dollar's gains in May put it on track for its biggest monthly rise against a basket of currencies since at least February 2006, after declining steadily all year, as expectations for a cut in U.S. interest rates dimmed.

The implied chance of the Fed cutting rates by 25 basis points by 2008 is now less than 50%, down from earlier in the year when futures traders priced in at least two cuts.

Some economists now expect the Fed will eventually have to raise rates, joining the European Central Bank, the Bank of England and the Bank of Canada, which are all expected to tighten policy at least once more this year to contain inflation pressures.

"In the end, the Fed may not need to cut rates several times this year as was expected and that, combined with some good economic indicators, has been supporting the dollar," said Paresh Upadhyaya, a currency manager at Putnam Investments in Boston. "The minutes reiterate their view that inflation remains a risk."

The euro was down , having earlier dipped below $1.3410, the lowest level since April 11.

In the Fed minutes policy makers said risks to economic activity are tilted to the downside while the risk that inflation may fail to ease is still the bank's "predominant concern," as expected by most traders.

"The minutes have been largely overlooked mostly because markets have already discerned what the data indicates about economic conditions," said Charmaine Buskas, currency analyst at Moody's in West Chester, Pennsylvania.

The Japanese yen was slightly higher against the dollar after a 6.5% fall in Chinese stocks after China raised a tax on stock trades appeared not to have a lasting effect on risk appetite and more specifically on carry trades, where investors borrow low-yielding currencies such as the yen to buy higher-yielding assets.

The dollar fell versus the yen , while the euro was down against the Japanese currency .

"China's decision affects mainly local investors," said Putnam's Upadhyaya. "It's not a shock big enough to derail the carry trade or spoil investor's appetite for higher-yielding currencies."

The resilience in investor penchant for high-yielding currencies was most reflected in the Australian dollar and New Zealand dollar on Wednesday. The Australian dollar rose , while the New Zealand dollar jumped .