Dollar Mixed After Personal Income Report

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NEW YORK (MarketWatch) -- The dollar rose against the euro, but fell slightly against the yen Monday, after a government report showed U.S. personal income rose more-than-forecast in September.

At the same time, the greenback also found some support after Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, said he continues to be more worries about the outlook for inflation than an economic downturn.

"The core PCE for August was revised higher to 0.3% month-on-month and along with Fed's Lacker's expected hawkish comments is the likely source of the dollar pop," said Brian Dolan, director of research at Forex.com, a division of Gain Capital.

In New York trading, the dollar was quoted at 117.45 yen, compared with 117.58 yen late Friday. The euro changed hands at $1.2711, compared with $1.2732.

The British pound traded at $1.9019, compared with $1.8961. The dollar was at 1.2492, compared with 1.2486 francs.

The euro fetched 149.34 yen compared with 149.71 yen.

The core personal consumption expenditure price index -- the Federal Reserve's favored measure of underlying inflation -- rose 0.2% in September, as expected, bringing the year-over-year increase down to 2.4% from a decade-high 2.5% in August. The core rate excludes food and energy prices.

Nominal incomes rose 0.5% in September. Economists surveyed by MarketWatch had been expecting expected a 0.4% gain.

Inflation 'discomforting'

In a breakfast speech to the Greater Baltimore Committee, Lacker said "the economy is resilient enough to withstand further tightening." Lacker described the economy as in a transition from above-trend growth rate to near-trend growth rate, which he put in a range of 2.5% to 3% GDP growth.

Lacker, who has dissented in the last three Federal Open Market Committee meetings in favor of higher U.S. interest rates, also said that fears of a housing catastrophe are overblown and that consumer spending is holding up well even though house prices are falling. On the other hand, the outlook for inflation remains "discomforting," he said.

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The Federal Open Market Committee last week held its benchmark interest rate steady at 5.25%. This was the third straight meeting in which policymakers decided to remain on the sidelines.

The dollar tumbled to a one-month low against the yen and a more than three-week low versus the euro Friday, after a Commerce Department report showed the U.S. economy grew at a real 1.6% seasonally adjusted annual rate in the third-quarter, blow expectations of an increase of 2%.

Diversification in focus

The United Arab Emirates reasserted Monday that it plans to increase its reserve holdings in euros by 10%. The UAE said it's considering diversifying into the yen, euro and the British pound.

Ashraf Laidi, chief foreign-exchange analyst at CMC Markets, said although the central bank of UAE has made similar comments in more than two occasions so far this year, "today's comments stand out as they include remarks that dollar reserves could be reduced to as low as 50% of the total $25 billion currently held."

Analysts estimate the UAE currently holds about 98% of its reserves in dollars and 2% in euros.

Separately, the yen received a boost after the Swiss National Bank disclosed that that it had bolstered yen holdings in its foreign-exchange reserves by $1.8 billion in the latest quarter. The share of U.S. dollar holdings in its reserves fell to about 25% from 27%.

The news follows comments made by the Bank of Russia on Oct. 16 that it had started buying yen and intended to raise the proportion of yen to several percent of total reserves from close to zero percent at present.

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I found this very interesting. The US dollar hits a 23 year record high against the British Pound, yet on the same morning hits a 13 year historical low against the Japanese Yen. This just goes to show how volatile the markets really are