Foreign Currency Report 04 October 06

USD

The dollar may strengthen after a Federal Reserve Bank President signaled concern that inflationary pressure in the world's largest economy will increase.

The currency may rise for a second day on speculation Fed officials including Vice Chairman Donald Kohn will also highlight inflation risk, quelling prospects for lower interest rates. Hoenig, a non-voting member of the policy setting Federal Open Market Committee, said inflation is ``too high'' in a speech in Albuquerque, New Mexico.

``Rhetoric from the Fed will be consistent with what we've seen recently, which is that they cannot be complacent on elevated inflationary pressures,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``The markets may be a little bit too aggressive in pricing in the start of an easing cycle. The dollar stands to benefit.''

The Fed has held its key rate at 5.25 percent for the last two meetings and next meets on Oct. 24-25. Interest-rate futures show traders see 30 percent odds of a cut in the target for overnight loans between banks to 5 percent at a Jan. 31 meeting.

St. Louis Fed President William Poole last week said that ``inflation is always a concern,'' adding that the decision on rates hinges on the performance of inflation and growth.

GBP

Sterling gained against the dollar and euro yesterday, driven by its strength by expectations the Bank of England would raise interest rates in November.

Investors shrugged off data showing a fall in British mortgage equity withdrawal in the second quarter.A survey of British manufacturing activity published on Monday reinforced expectations the Bank of England would raise interest rates in November from the current 4.75 percent.

A key house price survey for September by mortgage lender Halifax and a British services sector survey are due out today.

House prices rose by 1% in September and are increasing at an annual rate of 8%, according to the Halifax, the UK's biggest mortgage lender.

This is the second month in a row that house prices have shown a strong rise, potentially adding to the case for an interest rate increase.

The Bank of England will announce its latest rate decision tomorrow.

Euro

The financial times today quotes '' That the BOE monetary policy committee is expected to keep rates on hold at 4.75 per cent for the moment.

But the ECB is expected to lift its main rate by a quarter point to 3.25 per cent at its meeting, Robust economic growth in the eurozone was underlined by Monday's strong reading from the regions manufacturing sector.