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Dollar Rises vs. Euro as Fed Talks Up Economic Price Pressures

The dollar rose against the euro Thursday after the Federal Reserve, which held interest rates steady as expected, reiterated concerns about lingering price pressures in the U.S. economy.

The Fed dropped from its policy statement a description of core inflation as "elevated." But it also said its main concern was that inflation might fail to moderate.

Analysts said markets ultimately reacted to the Fed's inflation concerns by pushing the dollar higher.

"The FOMC statement was more hawkish than what people are expecting because of the inflation aspect. Markets were pricing in greater chances of a rate cut by the end of the year given the subprime and housing problems," said Ken Landon, global currency strategist at JP Morgan Chase in New York.

"But the statement did not state any particular concern about housing or subprime," Landon added, referring to worries about defaults on subprime mortgage loans, which are extended to borrowers with poor credit.

Late afternoon, the euro was down 0.1% at $1.3435. Against the yen, the dollar held gains at 123.20 yen, up 0.3% from late Wednesday.

Other analysts said the Fed's assertion that "sustained moderation in inflation pressures has yet to be convincingly demonstrated" suggests a new focus on headline inflation, which unlike the core number includes food and energy costs.

Ashraf Laidi, chief FX analyst at CMC Markets in New York, called it "a clear signal to the market that the central bank's anti-inflation vigilance will not be limited to further declines in core inflation, but (will be applied) also to headline price pressures."

He said that should provide "a fundamental source of short-term dollar stability."

The implied prospects for a lone rate cut this year sank as low as 15% from 22% before the end of the FOMC deliberations and more than 50% on Wednesday.

Earlier in the session, the focus was on the return of the investors' risk appetite in the market, with the yen's three-day rally stalling on Thursday. A rebound in global stock markets, helped by fading concerns about the U.S. subprime mortgage market, prompted investors to borrow the Japanese currency again to fund carry trades.

In carry trades, investors borrow in a low-yielding currency such as the yen to buy securities in a currency with high interest rates.

The high-yielding Australian and New Zealand dollars jumped against the yen. The New Zealand dollar gained as much as 1.2% against the yen before trading back down to 93.11 still up 0.5% on the day.

The Australian dollar climbed 1.3% to 104.25 yen, moving towards a 16-year peak hit last week.