By Kate Gibson & Osamu Tsukimori, CBS MarketWatch.com
Aug. 11, 2004

CHICAGO (CBS.MW) - The dollar on Wednesday lost ground against key currency rivals, losing steam in European and then U.S. trade as the market pondered Federal Reserve optimism on the economy.

While the dollar rallied after Tuesday's Fed rate increase and prediction that a recent downturn would prove short-lived, at least one analyst predicted the move higher would not last.

"The market fell for Greenspan's upbeat economic view before, in the July 20 monetary policy update," said Steve Barrow, a Bear Stearns currency analyst. "We doubt that it will be fooled for a second time," said Barrow.

In U.S. trade Wednesday, the greenback was mixed. The dollar was last down 0.2 percent against the yen, at 111.10 yen. The U.S. currency was up 0.2 percent versus the euro, with Europe's common currency at $1.2207. The dollar was off 0.1 percent against the British pound, with sterling at $1.8275.

The dollar rally Tuesday extended into overnight Asian trade after the Fed hiked its target lending rate to 1.50 percent and repeated its message that rate increases can proceed at a "measured" pace. It said higher oil prices had hurt the economy but pictured renewed economic growth in the second half of the year. See full story.

"The Fed's statement was unexpectedly bullish about the U.S. economy and raised speculation about another rate hike in September," said Ryohei Muramatsu, senior currenty trader at Commerzbank AG in Tokyo. "But I don't think that the Fed will raise rates next month because of the soaring oil prices and the resulting dent in consumer spending."

Crude oil futures were back on the rise Wednesday amid ongoing supply concerns and thoughts of increased demand. In London trade, September-dated futures were last up 9 cents at $44.61 a barrel. See Futures Movers.

The yen got some support after the Nikkei Average rose for a second session, raising prospects for increased fund flows into Japanese equities. The Nikkei ended up 0.9 percent. See full story..

Japanese data Wednesday was mostly yen-supportive, yet appeared to have little impact on trade.

Japan's wholesale prices rose 1.6 percent in July from a year earlier, marking the fifth straight month of gains and the fastest increase since May 1991, reflecting soaring crude oil prices, the Bank of Japan said in a preliminary report Wednesday. The reading followed a 0.9 percent rise in May and a 1.4 percent gain in June.

Ministry of Finance fund flow data showed overseas investors bought Japanese stocks for a second month in July.

Foreign investors bought a net 235.4 billion yen ($2.1 billion) of Japanese stocks on a contract basis in July, compared with a net purchase of 855 billion yen on a settlement basis in June.

Overseas investors bought a net 327.3 billion yen of Japanese stocks and bonds in July.

More Finance Ministry data showed that Japan's current account surplus - the broadest measure of trade in goods and services - rose 15.7 percent in June from a year ago to 1.2809 trillion yen.

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