Dollar holds firm on Fed rate talk

The dollar remained firm yesterday near this week's three-month highs against the euro and 16-month peaks versus the yen as a Federal Reserve official joined the hawkish chorus on US interest rates.

The dollar also hit a two-month high against sterling and against an index of major currencies as investors priced in prospects for the Fed to press ahead with its 15-month credit-tightening campaign.

Atlanta Fed President Jack Guynn said on Monday that the Fed's tightening campaign still has "a ways to go" before completion.

Analysts said strong data, equity inflows and bond yields were also helping the US currency. Rising US Treasury bond yields have drawn increased international investment.

"Yields are the main factor driving flows. The key factor supporting the dollar is expectation of higher rates and acceleration of inflation expectations," said Lena Komileva, market economist at Tullett Liberty.

By 0956 GMT, the euro was slightly higher on the day at $1.1935 after struggling to break support near $1.1900, close to its lowest level in three months.

The euro was little moved by inflation data that showed eurozone producer prices rose 0.4 per cent in August from July, in line with market expectations. The dollar was 0.16 per cent higher at 114.29 yen, close to a 16-month high marked near 114.40 yen on Monday.

"Markets are looking again to challenge the lows of the year in euro/dollar, which were approached yesterday. People are tempted to look at those levels again," Dresdner Kleinwort Wasserstein currency strategist Tim Fox said.

Traders said the dollar might have trouble pushing higher as Japanese exporters are hoping to sell the US currency above 114.50 yen. Resistance was seen at 114.90 yen, the May 2004 high above which would be a two-year peak.

Sterling also hit a fresh two-month low at $1.7514.

Analysts said insatiable demand from Japanese investors for higher-yielding foreign bonds had pressured the yen, which hit a seven-year low against the Australian dollar and an eight-year low versus the New Zealand dollar.

Other Fed officials are expected to weigh in on the need for more inflation-fighting rate raises.