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Foreign Exchange

Dollar pares weakness as euro investors focus on potential US rate rise

European investors bought the dollar in early trade on Thursday, paring overnight declines as investors bet it would not be long before the US takes the first step to start raising interest rates.

Earlier, the dollar declined after China's central bank said it will increase the role of interest rates in managing inflation expectations and regulating overall demand. China may raise the deposit rate to eliminate negative real interest rates, said 21st Century Business Herald, citing a central bank adviser.

The New Zealand dollar also rose, after the government unveiled plans to cut spending and sell assets to balance its budget over the next four years, a year earlier than expectations. The currency traded at 0.7921 cents from 0.7881 cents, traders said. Standard & Poor’s and Fitch affirmed New Zealand’s ratings following the announcement.

Speculation over an end to the Fed’s program of quantitative easing boosted appetite for the greenback, with investors seeing the move as the first step to toward raising interest rates, said Greg Gibbs, a strategist at RBS Global Banking & Markets in Sydney.

“We saw some dollar weakness overnight, but Europe didn’t really buy into that and the move was reversed over the last couple of hours,” Gibbs said. “The U.S. is going to close out QEII in six weeks time and the market can’t really see past that.”

The euro traded down at $1.4271 against the dollar early in London, after earlier rising to $1.4293. US FOMC minutes published on Wednesday showed some Fed officials saw a rise in inflation risks, raising the prospect of a faster return to higher interest rates.

A report on Thursday is likely to show U.S. existing homes sales rose 2 percent to a 5.2 million annual pace in April after gaining 3.7 percent in March, according to the median forecast of economists surveyed by Bloomberg News.

Elsewhere, the South Korean Won was little changed after authorities said it may lower limits on foreign exchange forward positions, in a move to slow hot money flows into the country. An unidentified official told Dow Jones that authorities will agree to cut the maximum ratio of forward positions to capital to 200 percent from 250 percent for foreign banks operating in South Korea, and to 40 percent from 50 percent for local banks.

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