Dollar hits 2-month high vs euro as Fed meets

AP News
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Posted: Dec 15, 2009 4:26 PM

The dollar rose Tuesday to its highest level against the euro since late September amid worries about European debt problems and as the Federal Reserve began a two-day meeting on interest rate policy.

The 16-nation euro fell as low as $1.4504 in New York trading, its lowest point since Sept. 10. By the late afternoon, the euro traded at $1.4529, down from $1.4647 late Monday.

The dollar has rebounded strongly in December as traders lock in their gains on the euro's rise earlier in the year and investors wonder if the U.S. recovery will be faster and stronger than expected.

Just before Thanksgiving, the euro traded above $1.51. Stronger-than-expected data on retail sales and employment have tugged investors into betting on the chance the Fed could hike rates as early as the first half of 2010.

The Fed is expected to keep its benchmark interest rate near zero at the conclusion of its two-day meeting on Wednesday. Investors will keep an eye on changes in the central bank's language to see if the Fed signals it will start raising rates soon.

Higher interest rates, or expectations of higher rates, can support a currency as investors transfer funds to where they could earn higher returns.

On Tuesday, the government said wholesale inflation rose 1.8 percent in November, more than analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the biggest gain in a year. If prices keep rising, that could nudge the Fed to hike rates more quickly in order to counteract inflation.

In other late trading Tuesday in New York, the British pound fell to $1.6256 from $1.6304 while the dollar rose to 89.74 Japanese yen from 88.63 late Monday in New York. The dollar also rose to 1.0615 Canadian dollars from 1.0595 Canadian dollars and gained to 1.0409 Swiss francs from 1.0322 francs.

The dollar got a boost as investors fretted about the state of public and bank finances in European countries that use the euro. In Greece, new Prime Minister George Papandreou moved to calm investors nervous about the country's debt levels by announcing spending cuts, part of a move to cut borrowing from current levels over 12 percent of economic output to under 3 percent by 2013. The Austrian government nationalized a bank in order to prevent in from bankruptcy due partly to exposure to bad loans in Easterm Europe.