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Dollar Firms on Economic Jitters

The greenback was firmer against most major rivals Wednesday, although it lost ground against the pound.

By Joe Manimbo of Travelex

The dollar held steady against most major rivals, although it fell further against the pound after the minutes from the Bank of England's meeting earlier this month revealed that one policymaker favored an interest rate hike.

Overall, market sentiment has been cautious this week on concerns about the health of the global economy. Renewed worries about the condition of the eurozone banking sector, combined with disappointing U.S. existing-home sales in May, helped to stall a recent rally in riskier assets such as stocks and commodities.

The

Federal Reserve's

interest rate announcement this afternoon is also helping to keep many market participants sidelined. The Federal Open Market Committee, the central bank's rate-setting team, is expected to keep U.S. borrowing costs unchanged near zero to support the recovery. Investors also expect the FOMC to renew its pledge to keep rates ultralow for quite a while, given continued weakness in the housing sector and a high jobless rate just below 10%. Investors are also bracing for the report at 10 a.m. EDT today on

U.S. new-home sales in May.

Expectations are that sales plunged.

The Canadian dollar fell to a one-week low against the greenback, dragged down by generally weak investor sentiment and by remarks yesterday by a Bank of Canada official who cast some doubt on the timing of the next hike in local lending rates. BOC deputy governor Timothy Lane said that a strong loonie could be a key consideration in setting monetary policy in the months ahead. The Canadian central bank next meets on July 20. A report on Canadian retail sales is due out this morning.

EUR

: The euro neared a one-week low against the greenback as a backdrop of depressed risk sentiment and renewed worries about the health of banks in the eurozone kept pressure on the single currency.

Earlier this week, Fitch Ratings downgraded one of the bloc's biggest banks, citing a decline in the quantity of its assets as a result of the debt crisis that is hurting states like Greece and Spain.

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The euro continues to see its direction dictated by headlines on the bloc's sovereign debt crisis. Europe's common currency was little changed by generally mixed data Wednesday. Germany's Gfk index, a forward-looking survey of consumer sentiment, unexpectedly held steady at 3.5 in July compared to expectations for a decline to 3.3.

The eurozone composite PMI survey, which takes into account both the manufacturing and services sectors, fell as expected to 56.0 in June from 56.4 the previous month. The euro earlier this week had touched its highest level in a month against the dollar. Nevertheless, the single currency is expected to remain vulnerable going forward given persistent concerns about the region's sovereign debt crisis, which poses significant risks to the bloc's banking sector.

GBP

: Overnight, the pound hit a fresh mid-May high against the greenback, finding residual support from yesterday's U.K. budget plan to tackle the nation's record deficit.

The British currency also got a lift after the minutes from the Bank of England's June 10 meeting showed that one policymaker voted in favor a hike in interest rates. Andrew Sentance, a BOE official generally regarded as being hawkish on inflation, voted to boost lending rates for the first time in nearly two years. The Monetary Policy Committee voted 7-1 in favor of leaving borrowing costs unchanged at 0.5%. The MPC did vote unanimously to leave its quantitative easing target unchanged at 200 billion pounds. A recent increase in U.K. price pressures was seen at the root of Mr. Sentance's preference for higher interest rates.

In April, annual consumer prices in the UK rose to a 17-month high. However, most U.K. policymakers expect inflation to cool in the months ahead as a result of the new coalition government's aggressive spending cuts, which are aimed at slashing its budget deficit. Mr. Sentance's dissenting vote at the June meeting is not expected to alter the outlook for low U.K. interest rates for a prolonged period. Consequently, the pound's gains this week might be short-lived.

CAD

: Canadian retail sales fell by a greater-than-expected 2.0% month over month in April. In March they rose 2.2% month over month. Investors had expected a decline of 0.4% in April. Even excluding autos, Canadian retail sales tumbled 1.2% in April compared with a 1.7% increase in March.

USD

: The dollar's generally firmer tone this week has been the result of renewed safe-haven flows on fresh concerns about the outlook for the global economy. U.S. data yesterday tested the notion the U.S. recovery was outpacing some of its peers. After yesterday's disappointing existing-home sales figures, the market will get a look today at new-home sales, which are expected to show continued weakness in the housing sector. That weakness is one of the chief reasons why the Fed today is expected to maintain its outlook for low interest rates for some time. The FOMC should announce its rate decision this afternoon around 2:15 p.m. EDT.

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