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FOREX-Dollar hits 6-mo peak vs euro on Fed, Greece woes

Published 01/27/2010, 04:17 PM
Updated 01/27/2010, 04:21 PM

* Euro falls to six-month low vs dollar on Fed, Greece

* Fed keeps rates low but ends programs, Hoenig dissents

* Central banks to end emergency swap lines

* Greece fiscal woes weigh on euro

(Adds quotes, details, updates prices)

By Steven C. Johnson

NEW YORK, Jan 27 (Reuters) - The dollar hit a six-month high against the euro on Wednesday after the Federal Reserve said it intends to end some emergency lending and asset-buying programs and sounded slightly more upbeat on the U.S. economy.

The euro fell below $1.40 for the first time since July after the Fed said U.S. economic activity had strengthened.

And while the central bank said it will keep interest rates low for some time yet, a dissenting vote from one official suggested pressure was building for tighter policy, which would boost returns on dollar-denominated assets.

"The statement is overall a positive one. The Fed is saying they have enough confidence in the markets to let the liquidity measures expire as expected," said Kurt Karl, chief U.S. economist at Swiss Re in New York. ID:nN27180815

In particular, analysts said the dollar got a boost when the Fed and other major central banks said they would end emergency dollar lending operations on Feb. 1. ID:nNYS007731.

"That takes away dollars in circulation and that should be dollar-supportive simply because of supply and demand," said Greg Salvaggio, senior vice president at Tempus Consulting in Washington.

According to Reuters data, the euro fell to $1.3994, its lowest since July 15. It traded above $1.51 in late 2009.

Worries about Greece's fiscal health also weighed on the currency, which last changed hands at $1.4018, down 0.4 percent on the day.

The dollar also rose 0.4 percent to 90.01 yen JPY=>, wiping out earlier losses that took it as low as 89.15 yen. It was also up 0.4 percent at 1.0500 Swiss francs CHF=>, while the British pound was up 0.1 percent at $1.6164 GBP=>.

The Fed's board voted 9-1 to keep rates near zero for an extended period, with Kansas City Fed President Thomas Hoenig dissenting.

"Going forward, that's more of a dollar positive scenario since that suggests in coming meetings, we could see that phrase (extended period) removed from their statement," said Joe Manimbo, a currency trader at Travelex Global Business Payments in Washington.

Rising interest rates would make holding dollars more attractive for global investors.

Worries about Greece also kept the euro under pressure, with the spread of the 10-year Greek bond yield GR10YT=RR over benchmark German Bunds EU10YT=RR hitting its widest since Greece adopted the euro currency in 2001.

Fitch Ratings added to the anxiety when it said a downgrade for Portugal's credit rating is "more likely than not." See ID:nLDE60Q1GU.

"The ability of these countries to actually go to capital markets for refinancing down the road will certainly have a bearing on the euro," said Dean Popplewell, chief strategist at OANDA, an FX brokerage in Toronto.

The Australian dollar fell 0.5 percent to $0.8941 AUD=> despite data showing a rise in consumer prices and hinting at a central bank rate hike next week. ID:nSGE60O04G

Markets were also focused on U.S. President Barack Obama's State of the Union address tonight and a looming and as yet uncertain Senate vote to confirm Ben Bernanke as Fed Chairman for a second term. His term expires Sunday. ID:nN2699162

(Additional reporting by Wanfeng Zhou, Vivianne Rodrigues, Gertrude Chavez-Dreyfuss and Nick Olivari; Editing by Andrew Hay)

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