Dollar keeps gains

The dollar steadied against the euro and yen on Friday, retaining gains made the previous session on views that the Federal Reserve may keep interest rates on hold for some time. The Fed left the funds rate unchanged at 5.25 percent on Wednesday but eliminated a reference to possible further rate hikes in its post-meeting statement.
Investors at first took the shift as a sign that a rate cut may be near, selling the dollar against major currencies and pushing the US currency to a two-year low against the euro. But they soon started to consider that the Fed might not be in hurry to cut rates and that the dollar might be oversold, as the US central bank also reiterated that inflation was still its main concern.
"The Fed changed its bias to neutral, that's all," said Nobuo Ibaraki, forex manager at Nomura Trust and Banking. "The statement was not something that suggests a rate cut, while the central bank mentioned inflation worries."
US short-term interest rate futures priced in about a 30 percent chance of a rate cut by the end of June, down from about 50 percent just after the Fed's statement on Wednesday.
The euro was little changed against the dollar around $1.3330. The single currency had climbed to $1.3412 in the previous session, the highest since March 2005, as investors bet the European Central Bank will further boost interest rates this year from the current 3.75 percent.
Against the yen, the euro also held steady at 157.50 yen. Traders said some dealers booked profits on the euro after the single currency recovered about three-quarters of its sharp losses made amid investor risk aversion in the past three weeks.
Heavy sell-offs in global equities forced investors to cut their holdings of risk assets, prompting aggressive yen buy-backs against the euro and other currencies.
Market players have been using the low-yielding yen as a source of financing investment in higher-yielding currencies and overseas assets, helping the euro to hit an all-time high near 160 yen last month. The dollar was also little changed at 118.15 yen. The dollar rose 0.4 percent against the yen in the previous session.
The Australian dollar edged higher towards a 10-year peak of $0.8093 hit the previous day. Stronger metal prices, as well as expectations that Australia's central bank will raise interest rates as early as next month from the current 6.25 percent have been supportive for the Aussie.
Tokyo trade was subdued as Japanese institutional investors were reluctant to take positions ahead of Japan's financial year-end on March 31, traders said. Fears that sell-offs in equities might have not yet run their course lingered as Tokyo's Nikkei share average gave up a large part of earlier gains, making market players wary of selling the yen lower. The Nikkei kept slight gains but remained well below a seven-year closing high of 18,215.35 hit on February 26.
"It's possible that the woes in the US subprime mortgage sector return to the centre of attention," said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp. "Investors are still eyeing developments in the sector."
The market will look at Friday's report on existing home sales for any sign that subprime mortgage defaults have had a negative impact on the housing market. Economists forecast existing home sales to fall to an annualised 6.31 million in February from 6.46 million in January. US shares took a hit on worries that turmoil in the mortgage sector could damage the broader economy.