Dollar steady ahead of US interest rate decision

LONDON (AFP) - The dollar traded little changed against the euro and yen yesterday, as the market awaited the latest US interest rate decision and the Federal Reserve's assessment of US credit problems.

In late European trade, the single currency fell to 1.3750 dollars, from 1.3795 dollars in New York late on Monday.

The dollar eased to 118.39 yen, from 118.88 yen.

The US Federal Open Market Committee was fully expected to leave interest rates on hold at 5.25 percent at its meeting yesterday, with attention centring on the accompanying statement for clues on whether and when interest rates may be cut later in the year.

The key question will be whether worries about a potential credit crunch following the recent troubles in the US subprime lending market outweigh the Fed's concerns over inflation.

Bear Stearns analyst Steve Barrow said the Fed was most likely to take a "halfway house position," retaining its concerns over inflation but at the same time being mindful of the risks posed by the recent trouble in financial markets.

Though any signal of a possible rate cut at some point may be seen as potentially helpful in propping up the US economy, if the Fed suggests that the recent trouble on credit markets is the reason for this it could spook the market, sparking further dollar selling and risk reduction, Barrow said.

As such, the statement was more likely to be balanced, with little direct impact for currency markets.

Beyond the rate decision, the market is likely to revert back to reducing risk, to the benefit of the yen and putting pressure on the dollar, Barrow said.

Elsewhere, the pound was at eight-day lows against the dollar and hit two and a half month lows against the euro as the market looked ahead to Wednesday's key Bank of England inflation report.

The British central bank will set out its latest forecasts for growth and inflation and will probably signal a further rate rise in the autumn.

The pound was broadly weaker yesterday following the release of a very weak retail sales survey from the British Retail Consortium overnight, as well as being pressured by the reduction in risk exposure and the resultant shift out of high-yielding currencies.