Dollar Gains as Fed's Hoenig Says Inflation May Spur Rate Rise

The dollar rose against the euro as Federal Reserve Bank of Kansas City President Thomas Hoenig said ``serious'' inflation pressures may spur the central bank to raise interest rates.

The U.S. currency halted two days of losses versus the euro as the yield spread between Treasuries and German bunds narrowed to the least in two months after Hoenig said the economy would recover later this year. The British pound dropped against the dollar and euro after an industry survey showed U.K. consumer confidence fell in April to the lowest in at least four years.

``Some traders are looking at Hoenig's comments and pushing up the dollar,'' said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's sixth-largest lender. ``This is a very hawkish tone that highlights the Fed's concern that inflation may get out of hand. A rise in Treasury yields is also supporting the dollar.''

The dollar climbed to $1.5504 against the euro as of 12:49 p.m. in Tokyo, from $1.5532 in New York yesterday, when it fell to $1.5594, the lowest level since May 1. The U.S. currency was little changed at 104.77 yen. The euro fell to 162.43 yen from 162.71. The dollar may advance to $1.5420 per euro today, Yoshida forecast.

The U.S. currency rose to $1.9697 to the pound from $1.9738 and strengthened to 1.0530 versus the Swiss franc from 1.0521.

The pound fell after Nationwide Building Society said an index of sentiment taken from the responses of 1,000 people declined seven points to 70, the lowest since the survey began in May 2004. The U.K. currency dropped to 78.74 pence per euro from 78.69 yesterday.

`Significant Risk'

The dollar has rebounded 3.2 percent since April 22, when it sank to a record low of $1.6019. The Fed said rate reductions to date were ``substantial'' after lowering its benchmark last week by a quarter-percentage point to 2 percent, its seventh cut since September.

``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig, a non voting member of the Fed this year, said in a speech in Denver yesterday.

The yield advantage of the euro over the dollar has decreased as the spread between two-year German notes and equivalent U.S. Treasuries narrowed to 1.36 percentage points from 1.5 percentage points a week earlier.

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, rose to 73.088 from 72.999 yesterday. It dropped to a record of 70.698 on March 17.

Housing Report

Gains in the dollar may be limited by speculation an industry report today will show a housing slump is slowing the U.S. economy.

The National Association of Realtors' index of pending home resales fell 1 percent in March after a 1.9 percent decline in February, according to the median forecast of 30 economists surveyed by Bloomberg News. The report is due at 10 a.m. New York time.

Fannie Mae, the biggest financier of U.S. home loans, reported larger-than-expected losses and the price of crude oil surged past $122 a barrel for the first time.

``The dollar will remain weak,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., Japan's third-largest bank by assets. ``The U.S. slowdown, led by a housing slump and credit losses, is far from over. Hefty oil prices are adding to the dollar-bearish sentiment, especially against the euro.''

The dollar may fall to $1.5560 a euro and 104.30 yen today, Kato forecast.

Record Oil Prices

Crude oil rose yesterday to a record $122.73 a barrel in New York on threats to supply in Nigeria and Iraq and growing global fuel consumption. The price may go as high as $200 a barrel within two years, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a May 5 report. The euro versus the dollar has had a correlation of 0.96 with the price of crude oil in the past 12 months. A reading of 1 would mean they move in lockstep.

Bank of America Corp. lowered its forecast for the yen against the dollar as risk appetite among investors has improved. The second-largest U.S. bank predicts the currency will trade at 102 per dollar by the end of June, compared with a previous estimate of 99. It also expects the yen to decline to 105 by the end of September, a change from a previous forecast of 103.

The European Central Bank will leave the main refinancing rate at 4 percent tomorrow, according to all 53 economists surveyed by Bloomberg News.