The dollar rose against the yen and fell versus the euro on Wednesday as investors wondered about the effect Hurricane Katrina will have on economic growth and whether it will deter the Federal Reserve from raising interest rates further.
The dollar has bounced off recent multi-month lows against the euro and the yen as worries about the economic impact from Katrina were seen overdone, but traders said the currency's moves seemed aimless because its trend was unclear.
Some market participants said the dollar could retreat leading up to the Federal Reserve's meeting on September 20 given uncertainty about whether the central bank will pause its year-long campaign of raising rates. Others said the rise in oil prices to record highs above $70 last week has fuelled worries about mounting inflationary pressures, which could prompt the Fed to stick to its "measured" pace of credit tightening to ensure stable economic growth.
"The dollar had been oversold on worries that damage inflicted by Katrina would be extensive and very serious," said Mitsuru Sahara, senior trader at UFJ Bank.
He said such worries were fading as oil production in the Gulf of Mexico and refinery operations along the Gulf Coast recover after the hurricane and help push oil prices to two-week lows.
The dollar was also supported after US Treasury Secretary John Snow said that economic stimulus from rebuilding efforts in the wake of Katrina would likely boost gross domestic product in 2006 after weighing on growth for the rest of 2005.
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