Dollar gains on hopes for quicker rate hike

AP News
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Posted: Dec 18, 2009 5:24 PM

The euro dropped below $1.43 for the first time since early September Friday amid ongoing concerns about European banks and public finances and increasing expectations the Federal Reserve will hike interest rates in the first half of the year.

The 16-nation euro dropped to $1.4262 in New York trading Friday _ its weakest point since Sept. 3. In late afternoon trading, the euro bought $1.4329 compared with $1.4349 late Thursday.

Meanwhile, the British pound slipped to $1.6121 from $1.6156, while the dollar edged up to 90.40 Japanese yen from 89.96 yen.

"People are throwing in the towel on any attempts to sell the dollar," said Brian Dolan, chief currency strategist at Forex.com.

On Friday, the European Central Bank said it was increasing its expectations for total potential write-downs on securities and loans from the eurozone banking sector to 533 billion euros ($760.2 billion) from 488 billion euros for the period between 2007 to 2010. The earlier forecast was from June.

"The stream of negative news weighing on the euro continues," Dolan said.

Earlier this week, Standard & Poor's downgraded its credit rating on Greece, arguing the government's new economic plan was unlikely to lead to a "sustainable" reduction in the country's debts. That raised concerns about the creditworthiness of some of other heavily indebted eurozone countries.

Meanwhile, in the U.S., analysts say they increasingly expect the Fed to hike rates in the first half of next year, rather than the second half or even 2011.

The Fed has reiterated its pledge to keep interest rates near zero in its meeting earlier this week, but it noted improvements in the economy and detailed the beginnings of a plan to dismantle a number of its extraordinary lending measures in 2010.

Higher interest rates, and the expectation of higher rates, can boost a currency as investors transfer funds to where they can earn higher returns.

Dolan said that earlier this month, traders were winding down their negative positions on the dollar in order to lock in gains on its decline this year. Now, however, they're building new positions that bet on the dollar, he said.

"This does look to be a more significant shift for the dollar than just a minor seasonal pullback," he said.

In other trading Friday, the dollar fell to 1.0656 Canadian dollars from 1.0702 and slipped to 1.0429 Swiss francs from 1.0466 francs.