Dollar hits two-month high after data. Citi sees yen going lower

Market Watch ^ | 12/15/2009 | Deborah Levine and Steve Goldstein

[SeekAndFind]

NEW YORK (MarketWatch) -- The dollar rose to the highest level in more than two months on Tuesday as stronger-than-expected U.S. economic reports lifted the greenback and concerns over the potential for European banks encountering a new round of problems weighed on the shared euro.

Currency traders also positioned themselves as the Federal Reserve began its two-day monetary policy meeting.

The dollar index /quotes/comstock/11j!i:dxy0 (DXY 76.91, +0.63, +0.82%) , which tracks the greenback against a trade-weighted basket of six major counterparts, rose to 77.022, compared with 76.351 late Monday. During the session, it touched 77.092, the highest on a closing basis since Oct. 1.

The euro fell to the lowest in three months, trading at $1.4531, down from $1.4653 late Monday, while the dollar jumped about 1.1% to 89.64 Japanese yen.

A pair of reports in the U.S. showed producer prices and industrial output rose more than anticipated last month, adding to evidence the largest global economy is recovering from its recession. See more on producer price data.

Meanwhile, Fed policy makers are expected to keep benchmark interest rates steady and retain the vast majority of the forward-looking portions of its statement on the economy due out Wednesday afternoon. See story previewing Fed meeting.

A media report hinted that the Fed may raise the discount rate -- its lending rate directly to banks -- as a small, first step away from its ultra-loose monetary policy it put in place since the credit crisis began. Several analysts downplayed this possibility, noting the Fed may opt to make such a change in a separate statement at a later time.

Expectations that any steps may be taken by the U.S. central bank make the dollar less attractive for carry trades, in which investors borrow a low-yielding currency to fund purchases of higher-yielding assets.

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Citi expects the dollar to rise to 98 yen, recommending investors to buy the cross now as it has lagged the broader gains by the dollar, strategists said in a note Tuesday. The lag in Japan's economy should be more of a drag on the yen now that interest-rate spreads are moving against Japan.

[Mount Athos]

Wow that’s crazy. Kudos to the contrarian freeper who predicted this, can’t remember his name now

[crghill]

I thought this might happen. While the dollar is a banana currency, it’s still considered the best worthless currency out there. I’m sure time will change that.

[agere_contra]

My guess: the dollar carry is going to unwind before Christmas and the S&P will whack back to 880.

[Orange1998]

Not sure about that since it appears the dollar the last week has decoupled from equities. The Dollar at 77 and equities across the board are hitting 52 week highs.