FOREX-Dollar burdened by heavy fuel costs, eyes OPEC
- FOREX-Dollar burdened by heavy fuel costs, eyes OPEC
(Updates prices and quotes, changes byline)
By Justyna Pawlak
LONDON, June 2 (Reuters) - The dollar headed towards a recent two-month low against the euro and three-month low versus the Swiss franc on Wednesday as markets prepared for potential damage to the U.S. economy from higher fuel costs.
Investors have been selling the dollar since late May after world oil prices soared to their highest levels in more than two decades on concerns U.S. consumer spending and business investment could slow down. This could delay U.S. rate hikes.
While Europe and Asia may also be hurt by high energy costs, many investors saw regional currencies such as the euro and the Swiss franc as good defensive bets because they are typically less sensitive to global growth cycles.
"The dollar is under pressure a bit...and oil should give more clues," said Peter Fontaine, currency strategist at KBC in Brussels.
"There has been the argument that high oil costs are bad for the economy and that we will not get a rate hike in the U.S. in June, that it will be postponed and the Fed will be more cautious."
Earlier on Wednesday, oil rose above $42 a barrel to 21-year highs on fears of potential supply disruptions in Saudi Arabia after deadly attacks by Islamic militants last week.
At 0935 GMT, the dollar traded down 0.20 percent on the day at $1.2265. A move beyond last week's low of $1.2296 would be the greenback's weakest since early April.
It traded 0.22 percent lower against the Swiss franc at 1.2443. A move below 1.2423 would be the dollar's weakest since late February.
The British pound also touched a two-month high on the dollar amid expectations of higher UK interest rates.
UK data released on Wednesday showed mortgage lending up by a record amount in April and consumer credit rising, although by less than expected, suggesting three interest rate hikes since the start of November have not yet put the brakes on Britain's booming housing market.
The dollar traded steady against the yen at 110.68 and was also weaker against the New Zealand and Australian dollars.
With the exact impact of high oil prices on the global economy and, eventually, on currency markets uncertain, investors are hungry for any clues about economic performance in the U.S. and the outlook for crude costs.
For now, any delays in the widely-expected Fed rate hikes would maintain the less attractive yield on dollar deposits, discouraging some investors.
Analysts say the yen, as well as the dollar, is susceptible to rising oil prices as a slowing U.S. economy could lead to less demand for Japanese exports.
This sentiment pulled down Japanese stock prices on Wednesday, with the key Nikkei stock average ending trade down 0.48 percent.
"Currencies like the euro and Swiss franc are seen as defensive currencies. They were never really bought on assumptions of strong growth," said Shahab Jalinoos, currency strategist at ABN AMRO in London.
"The U.S. interest rate curve has already priced in at least 100 basis points in rate hikes by the end of the year. If oil goes to $50 people will start to question whether we will see those rates hikes come through as aggressively as that."
But the longer-term currency effects are less clear, many analysts said.
"The market was not expecting rate hikes in the euro zone so this is less of an issue for the euro at this stage. But it will be an issue for the euro zone as well," said KBC's Fontaine.
Dealers said the market would be carefully watching the outcome of an Organisation of Petroleum Exporting Countries meeting on Thursday, at which the cartel is expected to consider an increase in production quotas that could ease rising prices.
However, Saudi oil minister Ali al-Naimi said on Wednesday that extra oil output might not immediately bring down high prices.
But he did reiterate that oil facilities in Saudi Arabia, the world's largest crude producer, were "very secure."
Dealers were also awaiting U.S. employment data due later in the week that could determine the near-term outlook for U.S. interest rates.
Copyright 2004, Reuters News Service