Gold''s partisans doubt that Fed can raise interest rates aggressively

Section:

By Joshua Krongold
Bloomber News Service
Monday, March 28, 2005

http://quote.bloomberg.com/apps/news?
pid=10000103&sid=aEDciugl03yk&refer=news_index

NEW YORK -- As the dollar heads for the biggest quarterly advance
against the euro since 2001, traders are more bullish on the U.S.
currency than they have been in 17 months, according to a Bloomberg
survey.

Sixty-four percent of the 33 traders, investors and strategists
polled from Sydney to New York on March 24 advised buying the dollar
against the European currency. The percentage is up from 43 percent
a week ago and the highest since October 2003. Fifty-three percent
said the U.S. currency would gain versus the yen, up from 33
percent.

The dollar has rallied 5.5 percent from a record low of $1.3666 per
euro on Dec. 30 as the Federal Reserve signals it will keep raising
interest rates and Europe's economy struggles to grow. Government
reports this week will show U.S. employers added more than 200,000
workers for a second straight month as German unemployment rose to a
postwar record, according to the median estimates of economists
polled by Bloomberg.

"People will keep looking to buy the dollar," said Thanos
Papasavvas, director of currency management in London at Credit
Suisse Asset Management, which oversees about $310 billion. "Even if
the U.S. jobs report is not quite as strong as forecasts, the market
will give the dollar the benefit of the doubt. That's the mood at
the moment."

Against the euro, the dollar rose 2.9 percent last week, to $1.2952
at 5 p.m. in London on March 25, according to electronic foreign-
exchange trading system EBS. The gain was the biggest in almost
three months. The U.S. currency strengthened 1.6 percent to 106.40
yen, the second-consecutive weekly advance.

Bloomberg's weekly currency survey accurately predicted the dollar
would advance versus the euro last week. Respondents were split on
the yen. The poll correctly forecast the direction of the dollar in
18 of the past 26 weeks versus the euro and in 15 weeks against the
yen.

"Sentiment for the dollar looks really bullish based on expectations
of higher interest rates in the U.S.," said Osamu Takashima, chief
analyst in Tokyo at the foreign exchange and treasury division at
the Bank of Tokyo-Mitsubishi Ltd. "The difference in growth
prospects between the U.S. and the other regions is pushing the
dollar higher."

U.S. companies added 220,000 workers to payrolls this month, down
from 262,000 in February, according to the median estimate of 35
economists in a Bloomberg survey. The two-month total would be the
highest since the economy added 657,000 jobs in April and May of
last year.

The dollar's advance last week accelerated after the Fed increased
its target rate for overnight loans between banks to 2.75 percent on
March 22. The central bank also suggested that inflation may
accelerate, spurring speculation it will scrap a practice of
increasing the rate in quarter-point increments.

"What has changed for the dollar is interest rates and expectations
of interest rates," said Tony Dolphin, director of economics and
strategy in London at Henderson Global Investors, which managed
about $128 billion as of June 30. "The reason the dollar has rallied
so far this year is because interest rates have moved up pretty
smartly."

The European Central Bank has left its benchmark interest rate at 2
percent since 2003, while the Bank of Japan has held borrowing costs
near zero for almost four years.

On March 22, the difference in yield between 10-year U.S. Treasury
notes and German bunds of similar maturity widened to 95.6 basis
points, the most since 2000. This gap was 89.3 basis points on March
24, up from 66.3 at the end of February and zero in September. A
basis point is 0.01 percentage point.

Any gains for the dollar may be limited, as a technical indicator
suggests the currency may be poised to fall. The euro's 14-day
relative strength index declined to 35.6 on March 24, the last day
of trading in London and New York before Easter holidays, the lowest
level since Feb. 9.

Versus the yen, the dollar's index climbed to 63.2 on March 25, the
highest since Feb. 9. The index is a gauge of momentum in a
specified period, and levels below 30 and above 70 suggests a change
in direction.

"The recent move higher in the dollar isn't necessarily over, but I
do think if we get down to levels around $1.27 to $1.28 it will
attract long-term buyers of the euro," said Mark Austin, head of
global currency strategy in London at HSBC Holdings Plc.

Japan's currency may snap its two-week decline against the dollar
with the help of a central bank survey, due this week, that may show
the country's manufacturers are more confident about an economic
recovery.

The Bank of Japan's quarterly Tankan survey, to be released on April
1, will show confidence among executives improved for the seventh
quarter in eight, based on the median forecast of economists
surveyed by Bloomberg.

"From a trading perspective, we are more bullish on the yen," said
Jens Nordvig, a currency strategist in New York at Goldman Sachs
Group Inc. "Some of the Japanese economic data has been better."

Japan's economy grew 0.5 percent in the fourth quarter, beating an
initial estimate of a contraction, the government said on March 14.

The dollar may still appreciate by a couple of cents against the
euro before its rally stalls as inflation figures trigger higher
bond yields, said Tony Norfield, head of global currency strategy at
ABN Amro Holding NV in London.

U.S. consumer prices rose the most in four months in February, the
Labor Department said on March 23. Excluding food and energy, prices
rose 2.4 percent from a year ago, the biggest increase since August
2002.

"The inflation report justifies why U.S. yields are going higher,
and for now that is giving a boost to the dollar," he said. Ten-year
Treasury note yields, which move inversely to prices, are up 20
basis points this month and 36 basis points this year. The yield on
the benchmark note last week reached 4.69 percent, the highest since
June.

Still, "it's questionable how far the rally in the dollar is going
to go," said Norfield. "Now that we've reached the $1.30 level, it
will be interesting to see whether central bankers and asset
managers step in and start to sell dollars" and buy euros, he said.

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