Dollar crawls higher but market wary of Rita

The dollar crawled up in choppy trade on Thursday, although it was capped by nervousness about the potential damage to the US economy from another monster hurricane churning towards the Gulf Coast.
Traders were so nervous about Hurricane Rita that the dollar got a lift on unsubstantiated market rumours that Rita had weakened, despite weather monitors showing it is the third most intense Atlantic hurricane on record.
"Just talk of the hurricane weakening was enough to push up the dollar," said Fumihiko Kawano, forex manager at Nomura Securities.
The dollar was also bought back as Tokyo dealers who held short positions in the currency covered those bets ahead of a Japanese national holiday on Friday.
The dollar rose to 111.55 yen from around 111.30 yen in late US trade, recovering about half of Wednesday's losses.
The dollar had hit a six-week high against the yen on Wednesday, a day after the Fed raised rates for the 11th straight policy meeting and signalled it would not stop its run of hikes.
The US currency's failure to break through key resistance levels spurred a spate of profit-taking, but the spectre of rising rates has helped to prop up the dollar.
"I think the dollar's adjustment following the Fed meeting is over, and it is returning to its rising trend," said Kazushi Awa, forex manager at Sumitomo Corp.
The euro was whiplashed - rising on concerns about the damage Rita could cause in the United States then giving up gains due to profit-taking triggered by rumours the storm had weakened.
It was little changed on the day at $1.2215, easing from the day's peak around $1.2270.
Traders said the hurricane could fracture already strained US oil producing capacity, boosting oil prices and choking consumer spending.
In the wake of Hurricane Katrina in late August, the dollar hit three-month lows against the euro.
The Federal Reserve said in its post-meeting statement on Tuesday that damage wrought by Katrina did not pose a persistent threat to the economy.
Still, some market players said Rita could tilt the Fed towards pausing its run of rate rises if the damage ripples through to the larger US economy.
Others said Rita's effect on the dollar should be short-term, and the currency was unlikely to break out of ranges of recent weeks, such as the 109-112 yen band.
"I don't think weather issues like hurricanes can breach the trading range," said Kikuko Takeda, market economist at Bank of Tokyo-Mitsubishi.