Dollar trades near 7-week high as oil drops to three-month lowest

The Fed kept rates at 2 percent as widely expected, with Dallas Fed President Richard Fisher the sole policymaker dissenting in favor of a rate hike, contrary to expectations that one other official might join him.Â

With the Fed highlighting both the risks to growth and its "significant concern" on inflation, a Reuters poll found most Wall Street bond dealers expect the central bank to keep rates on hold into 2009.

Analysts said oil's tumble to a three-month low of $118 a barrel has been the main factor driving the dollar's broad rebound by soothing concerns about the drag of steep energy prices on the struggling U.S. economy. Oil slipped slightly to $118.54 in Asia trade.

Mounting evidence that the economic gloom is spreading around the world has also hurt other major currencies where central banks are expected to respond by cutting interest rates, helping the dollar stand out by default.

"It will be hard to dislodge the dollar from these levels," Reuters quoted Junya Tanase, forex strategist at JPMorgan Chase as saying.

"But note that the dollar's strength is not owed to the U.S. economy's robustness, but rather due to the fact that other major economies are faring worse. Solid U.S. macro fundamentals will be necessary for the dollar to retain long-term support," he said.

A sharp rise in Wall Street shares was also a positive for the dollar, traders said. Asian equity markets took heart from the solid gains, with Japan's Nikkei average jumping 2.6 percent.

The dollar was unchanged from late New York trade at 108.28 yen after touching a seven-week high of 108.48 yen on trading platform EBS.

Traders say the dollar is on track to test key resistance at 108.60 yen, though they expect selling by Japanese exporters leaving orders to repatriate funds before Japan's "obon" summer holidays to slow the greenback's ascent.

The ICE Futures dollar index, which measures the currency's performance against a basket of six currencies, fell 0.2 percent to 73.771 down from a seven-week peak of 73.99.

The euro rose 0.3 percent to $1.5495 after hitting a seven-week low of $1.5445 on Tuesday. The euro may benefit in the short term as market players cover short positions before Thursday's European Central Bank meeting, traders said.

The ECB is expected to stand put on rates and retain a neutral bias, but analysts said a recent deterioration in economic conditions will make it increasingly difficult for the central bank to retain such a stance going forward.

The Australian dollar gained 0.2 percent to $0.9182 pausing from its slump to a four-month low of $0.9132 on Tuesday after the Reserve Bank of Australia kept rates unchanged at 7.25 percent but flagged an upcoming easing.