LONDON (Thomson Financial) - Lower oil prices and easing inflation worries came into play to help prop up the dollar, as did renewed speculation about possible U.S. interest rate hikes.
While oil prices remain elevated by historical levels, at $127 a barrel they are well down on the peak of $147 just a couple of weeks ago. Against this backdrop there is hope that the U.S. economy may recover sooner than expected, lending support to the beleaguered U.S. currency.
At 1527 GMT, the euro was down at $1.5698 from $1.5748 earlier. The latest fall extends yesterday's near 1 percent decline.
'A sustained move lower (in oil prices) would clearly pave the way for central banks globally to ease restrictive monetary stances that would be favourable for the dollar,' said economist Derek Halpenny at The Bank of Tokyo-Mitsubishi UFJ in London.
Also providing the dollar some support was the inflation warning from the Federal Reserve's Charles Plosser.
Plosser said rising inflation could force the Fed to start raising rates even before labour and financial markets recover, giving a big lift to the dollar. While Plosser is seen as one of the most hawkish members of the Fed's rate-setting committee, his remarks rekindled speculation about possible U.S. rate hikes that could boost the dollar.
'More dollar strength and yen weakness is prolonged amid the absence of major economic data, while the effect of supporting rhetoric from Treasury Secretary Paulson and hawkish comments from Philly Fed's Plosser continuing to hold,' said Ashraf Laidi at CMC Markets.
The dollar also received some support after U.S. Treasury Secretary Hank Paulson said on Tuesday a strong dollar is 'really very important'.
'The dollar has recovered sharply against nearly all major currencies with reassuring comments from Paulson and hawkish comments from Plosser cited as key factors that triggered the rebound,' said Halpenny.
After Tuesday's jump, the dollar finished above its 200-day moving average against the yen for the first time in a year, which analysts consider a strong positive technical signal.
'In some ways, the yen is caught between a rock and a hard place: the yen has been shunned due to the Bank of Japan's inability to fight inflation and could now be second choice to the dollar due to the limited scope for stimulus to the Japanese economy,' said Neil Mellor, currency strategist at Bank of New York Mellon.
The dollar was trading at 107.78 yen around where it was earlier.
Despite the dollar's recovery, traders were wary of pushing the dollar too high ahead of U.S. housing-related data later in the week, fearing that long positions on the greenback would be at risk should the numbers disappoint and thus knock the wind out of U.S. stocks.
Figures for U.S. existing home sales will be released on Thursday and new home sales data will be out on Friday.
Also of interest among market watchers is whether Plosser's hawkish stance on monetary policy is an isolated one, or if it will resonate with other Fed Board members.
In particular, Fed Board member Frederic Mishkin's appearance at a Bank of Canada economic conference in Ottawa later on Wednesday is being carefully watched.
Elsewhere, the pound was back near the $2 dollar mark after a hawkish set of minutes to the last rate-setting meeting at the Bank of England.
The Monetary Policy Committee was split three ways on the vote -- a majority of seven opting for unchanged rates, the typically dovish David Blanchflower voting for a cut, and Tim Besley pushing for a hike.
However, while the vote may seem balanced, Blanchflower is often seen as a maverick whereas Besley has more often been in tune with the majority of the MPC.
The pound was trading at $1.9987 and the euro was trading at 0.7853 pounds. @thomsonreuters.com ss/rw COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
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