Tue Aug 24, 2004
By Jamie McGeever

NEW YORK (Reuters) - The dollar extended gains early in New York on Tuesday as dealers continued to pare back bets against the dollar in predominantly technical trading.

The gains, particularly against sterling which slumped to a new three-month low, follow relatively hawkish remarks from Federal Reserve officials on Monday suggesting U.S. interest rates will be raised again next month.

Upbeat comments on the U.S. economy from Dallas Fed President Robert McTeer and Fed Governor Ben Bernanke bolstered the greenback across the board.

Sentiment toward the world's largest economy and oil consumer has also been boosted by further declines in the oil price down from last week's record high.

Although the prospect of rising U.S. rates is generally deemed positive for the dollar, the currency's gains this week do not signify an underlying market shift, analysts said, and technical factors and positioning remain the driving forces.

"Real money is still comfortable being on the sidelines," said Michael Woolfolk, senior currency strategist at Bank of New York in New York.

Dealers, who had mostly been short of dollars, have adopted a more neutral stance ahead of U.S. durable goods data on Wednesday and a keenly-awaited speech from Fed chief Alan Greenspan on Friday, he said.

"This is not fundamental buying," said a senior dealer at a large U.S. bank in New York. "This is definitely position squaring ... and the pain is in the high yielders."

Currencies like sterling and the Australian dollar, whose economies offer much higher interest rates than assets denominated in dollars and most other currencies, are under the most pressure because rising U.S. rates would narrow rate differentials in favor of the dollar.

The dollar reacted little to news that U.S. existing home sales for July dipped to a 6.72 million unit rate, weaker than market expectations for a decline to 6.81 million.

Early in New York Tuesday, the pound (GBP=: Quote, Profile, Research) was 0.5 percent weaker at $1.7974. It had traded at $1.7953, according to Reuters data, its lowest since mid-May.

The Australian dollar (AUD=: Quote, Profile, Research) was 0.7 percent weaker at $0.7077, and the euro (EUR=: Quote, Profile, Research) was down 0.2 percent at $1.2008, having briefly dipped under $1.2100.
The dollar was up modestly against the yen at 109.90 yen (JPY=: Quote, Profile, Research) and Swiss franc (CHF=: Quote, Profile, Research) at 1.2714 francs.

The euro is expected to attract good bids below $1.2100, dealers said, although sterling looks more vulnerable to further downside, which could see $1.7800 come into view.

The pound has been under heavy selling pressure since the minutes of the Bank of England Monetary Policy Committee's last meeting suggested its rate-raising cycle was drawing to an end.

This contrasts with the Fed, which raised rates this month for the second time in six weeks and said the economy was poised for a period of faster growth.

McTeer and Bernanke reiterated this view on Monday, saying the recovery is self-sustaining and able to withstand high oil prices. McTeer also said the Fed hasn't tightened monetary policy in a strict sense, rather it has reduced the extent of loose accommodation.

"They were a little bit hawkish," said Greg Anderson, senior currency strategist at ABN AMRO in Chicago. "They made it clear that Fed rates as they stand are accommodative. They will go up."

The dollar also benefited from a more positive backdrop Tuesday. Stocks and bond yields rose and gold and oil prices declined. After running up to just under $50 a barrel last week, U.S.-traded crude oil futures (CLc1: Quote, Profile, Research) were 0.6 percent lower on the day at $45.77 a barrel.

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