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Currency Center

Dollar edges higher

The greenback gains against the euro and the yen. All eyes are on the Fed's announcement next week.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The dollar edged higher against both the dollar and the yen on Thursday, as oil prices fell and investors expect the Federal Reserve to hold rates steady next week.

The euro bought $1.5502, down from $1.5535 late yesterday. When the euro buys fewer dollars, that means that the dollar is gaining.

The dollar bought ¥107.99, up from ¥107.88 on Wednesday evening. If the greenback buys more yen, that means the dollar is stronger.

The dollar was supported by oil prices, which closed $4.75 lower on Thursday, after the Chinese government said it would raise prices on gasoline and diesel.

"People are watching oil prices very, very closely, because when oil prices spike higher, the dollar tends to go lower," said Tom Benfer, director of foreign exchange at Bank of Montreal in New York.

On Wednesday, the greenback lost ground against both the euro and the yen, after a report from the Labor Department on Tuesday showed that food and energy had driven up wholesale inflation in the United States by 1.4%.

Listening to Central Banks

The Federal Reserve is holding a two-day meeting next week, culminating with an announcement on June 25 about what the central bank plans to do with interest rates.

The Fed has cut rates seven times since September, sending the dollar lower. However, "it is more than likely that they will leave rates on hold at the upcoming meeting," said Gareth Sylvester, senior currency strategist at HIFX in San Francisco. He added that most analysts seem to have the same perspective on the upcoming Fed meeting.

"There is no doubt that we will see the Fed tighten by the end of this year," said Sylvester. "But the question is when and how much?"

If the Fed lowers the key funds rate, money is more readily available to lend, and the value of the dollar decreases. If the Fed raises interest rates, the value of the dollar increases, combating inflation.

If the Fed does in fact finally pause its aggressive rate-cutting strategy, that indicates that the central bank is concerned about the falling value of the dollar.

"[Federal Reserve chief] Bernanke has been pretty clear that he is concerned about inflation," said Benfer. Investors will look very closely at the Fed statement to decipher what the central bank thinks about the economy, added Benfer.

The euro softens

Part of what is contributing to the strength of the dollar today is the weakening of the euro. "We saw the Swiss National Bank leave rates on hold and it is leading some analysts to think that a rate hike from the ECB [European Central Bank] is not a done deal," said Sylvester.

If the ECB increases interest rates, that supports the value of the euro, and makes it harder for the greenback to hold value. On the other hand, if the ECB does not increase interest rates, the euro will soften and the greenback can catch up.

As the dollar loses value, prices on essentials like food and gas can increase, pinching consumers' wallets.  To top of page

Track 17 major currencies

Features
Markets Last Change
Dow Jones 10,058.64 150.25 / 1.52%
Nasdaq 2,150.87 24.82 / 1.17%
S&P 500 1,070.52 13.78 / 1.30%
10-year Bond 97 25/32 Yield: 3.64%
U.S.Dollar 1 euro = $1.377 -0.002
February 9, 2010 12:00 AM ET
CompanyPrice% Change
UAL Corp 15.38 17.67%
AMR Corp 8.27 12.98%
Continental Airlines Inc 19.23 10.79%
US Airways Group Inc 6.43 8.43%
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