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Dollar falls as oil prices rise on Iran news

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Anonymous Coward
User ID: 113248
7/9/2008 1:35 PM
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Dollar falls as oil prices rise on Iran news

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FOREX-Dollar falls as oil prices rise on Iran news

Wed Jul 9, 2008 12:30pm EDT

By Gertrude Chavez-Dreyfuss

NEW YORK, July 9 (Reuters) - The U.S. dollar retreated across the board on Wednesday, as oil prices rallied on news Iran test-fired long- and medium-range missiles.

Rising political concerns also boosted safe-haven currencies such as the Swiss franc <CHF=>.

Iran's state media reported that the country had test-fired nine missiles, including one which it had previously said could reach Israel and U.S. bases in the region.

"The Iranian issue did have some impact to the extent that it boosted oil prices and that has caused a slippage in the dollar," said Nick Bennenbroek, head of FX strategy, at Wells Fargo in New York.

Oil recovered some of Tuesday's sharp drop in the wake of Iran's missile test, with U.S. crude CLc1 gaining nearly $2 to rise above $138 a barrel, further adding to the dollar's bearish tone. Higher oil prices tend to hurt the dollar because the United States is a heavy energy importer.

The dollar index, which tracks the greenback against a basket of six major currencies, fell 0.5 percent on the day to 72.595 .DXY in midday New York trading.

The dollar fell 0.4 percent to 1.0300 Swiss francs and versus the Japanese unit, it slipped 0.3 percent to 107.09 yen <JPY=>.

Tensions in the Middle East were further exacerbated after three policemen and three gunmen were killed in an attack on the U.S. consulate in Istanbul.

Analysts, however, said international politics could soon take a back seat once the number of economic reports picks up after Wednesday.

RATE DIFFERENTIALS STILL FAVOR EURO

The euro gained 0.5 percent to $1.5747 <EUR=> and edged up 0.1 percent to 168.64 yen <EURJPY=R>. Sterling, meanwhile, gained 0.6 percent to $1.9815 <GBP=>.

Comments on Wednesday from European Central Bank President Jean-Claude Trichet justifying the bank's rate increase last week and reiterating its inflation focus also underpinned the euro, analysts said. For details, see [ID:nL09227417].

"There is no mistaking the hawkish tone of his comments," said HSBC Bank USA in a research note.

While there is the very realistic chance that tighter ECB policy will weigh on growth in a manner that is unhelpful to the euro, that sequence of events could well take some time to play out, and interest rate dynamics could play the more dominant and euro-supportive role for much of this summer."

Trichet, however, did repeat that the United States should stress the importance of a strong U.S. dollar. That, however, did not prevent investors from selling the greenback as oil prices rose.

Emerging market currencies, on the other hand, gained ground. The U.S. dollar fell 0.8 percent versus the South African rand <ZAR=> to 7.6851 and dropped 2.4 percent against the Korean won <KRW=> to 998.60.

"Market conditions seem to be better especially after Bernanke's comments yesterday. Equities are holding up," said Wells Fargo's Bennenbroek.

"Overall, it seems emerging market currencies seem to be benefiting more than G10 currencies from calmer financial conditions."

Federal Reserve Chairman Ben Bernanke had assured investors on Wednesday that the central bank would keep assisting financial markets as long as they remained frail.

[link to www.reuters.com]

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