Traders are increasing bets on the extent to which U.S. rates will rise. Eurodollar futures contracts show traders and investors expect the Fed to raise its benchmark rate to at least 4 percent by the end of 2005, from 2.75 percent, after the central bank on March 23 noted ``pressures on inflation have picked up.''
The December Eurodollar futures contract yielded 4.305 percent today, up from 3.905 percent a month ago. It settles at a three-month lending rate that has averaged about 0.21 percentage point higher than the Fed's target rate in the past 10 years.
`Take a Break'
Gains in the dollar may be limited by speculation the rally will prompt some investors to bet the advance is excessive.
A technical indicator suggested the dollar is poised to fall. Its 10-day relative strength index against the euro fell to 29.70, and against the yen was at 68.08. The index is a gauge of momentum in a given period, and a level above 70 or below 30 suggests a change in direction.
``The long weekend in Europe and the U.S. will keep the market quiet, making it more likely the dollar will take a break from its rally,'' said Tetsu Aikawa, a currency sales manager in Tokyo at UFJ Bank Ltd. ``The run-up has been fast enough to trigger concerns of a pause.''
The dollar may drop to 105.80 yen and $1.2990 per euro today, he said.
`Disagree'
Citigroup Inc., the biggest financial services company, advised selling the dollar against the euro as it contested the view that the Fed is more likely to raise interest rates in larger increments this year.
``We disagree with this interpretation of the Fed's statement and disagree with the view that a 50 basis point tightening is more likely,'' Steven Saywell, chief currency strategist in London at Citigroup, wrote yesterday in a report. The bank expects the dollar to drop to $1.3670 per euro.
The Fed's benchmark rate exceeds the European Central Bank's key rate by three quarters of a point, the biggest gap since March 2001. The next U.S. policy-setting meeting is May 3.
`Dollar Supportive'
The U.S. next week is forecast to say the economy added more than 200,000 non-farm jobs for a second month in March, according to a Bloomberg survey of economists.
U.S. consumer prices rose 0.4 percent in February, the most in four months and more than the 0.3 percent median forecast in a Bloomberg survey of economists, the government said on March 23. A Labor Department report the day before showed wholesale prices rose for a second month in February.
``The dollar's upward trend is going to continue,'' said Toru Umemoto, market analyst in Tokyo at Keio University's Global Security Research Center. ``Yields are rising, and the U.S. economy is strengthening. All of this is dollar supportive.''
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