Dollar tumbles on Rita fears

By Justyna Pawlak
Wed Sep 21, 2005, 6:26 AM ET

LONDON (Reuters) - The dollar lost about one percent versus the euro and Swiss franc on Wednesday, despite Tuesday's rise in U.S. interest rates, as markets feared a new hurricane could wreak as much damage in the United States as Katrina.

Hurricane Rita gained power on Wednesday and headed across the Gulf of Mexico on a course that could take it to Texas and dump more rain on Katrina-battered Louisiana.

Katrina devastation triggered a fall in the dollar to 2-1/2 month lows as oil prices soared.

Meanwhile, higher interest rates failed to support the dollar after one member of the Federal Open Markets Committee voted against the latest hike.

"The dollar is coming under pressure across the board, following the FOMC because of the dissenter," said Ian Stannard, currency strategist at BNP Paribas in London.

By 1005 GMT, the euro was up 0.8 percent at $1.2207 after climbing as high as $1.2234.

The dollar lost 0.8 percent to 1.2711 Swiss francs and shed 0.6 percent to 111.23 yen after touching a six-week low of 112.03 yen earlier in the session.

Oil prices bounced back above $67 a barrel on Wednesday.

DAMAGED DOLLAR
The U.S. currency's inability to keep its upward momentum after the Federal Reserve raised rates on Tuesday and left the door open for further increases also prompted traders to take profits on the dollar despite an initial rally.

"The market has been long on the dollar and since it didn't firm beyond $1.21, some people decided to take profits," said a trader at a foreign brokerage in Tokyo.

The dollar briefly gained on Tuesday after the Fed it said in its post-meeting statement that economic disruptions triggered by Hurricane Katrina did not pose a persistent threat and that it remained vigilant about the risks of inflation.

But some analysts said a vote by Fed Board Governor Mark Olsen for borrowing costs to be held steady added a note of caution as this was the first dissent since June 2003.

Investors fear that the damage caused by hurricanes could prompt the Fed to scale back its tightening plans.
Rita is expected to develop into a Category 4 storm on Wednesday, the same classification as Katrina which devastated New Orleans.

"That is preying on people's minds particularly if it hits areas with some key strategic oil facilities," said Kamal Sharma, currency strategist at Bank of America in London.

Elsewhere, sterling stood firm against the dollar after minutes from this month's Bank of England policy meeting revealed a unanimous vote to hold rates steady.

All nine members of the BoE's Monetary Policy Committee voted to keep interest rates at 4.5 percent this month, minutes of their September 7 and 8 meeting showed.

The Norwegian crown rose against the dollar before a Norges Bank interest rate decision at 1200 GMT. The bank is expected hold rates steady at 2.0 percent.

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