Dollar dips as rate hike speculation

The dollar drifted lower in Asian trade on Thursday, pressured by a rise in oil prices and fading expectations of US interest rate rises this year, dealers said.

The dollar slipped to 107.72 yen in Tokyo morning trade from 107.86 in New York late Wednesday.

The euro edged up to 1.5554 dollars from 1.5532 but was flat at 167.54 yen.

The greenback fell after another surge in oil prices. A White House spokesman downplayed expectations of an immediate impact on crude costs from a meeting of producer and consumer countries in Saudi Arabia on Sunday.

Traders buy commodities such as oil, which is priced in dollars, as a hedge when the currency weakens.

The greenback was also weighed down by losses on Wall Street, where investors were concerned about financial problems at a big regional banking group and the jump in crude prices.

The gloomy news caused investors to reassess their expectations of higher borrowing rates in the United States, despite inflation worries.

"Traders continued to scale back expectations for Fed interest rate hikes this year," noted NAB Capital strategist John Kyriakopoulos.

"The implied probability of an August 5 Fed rate hike has fallen to around 40 percent from above 70 a week ago," he added.

At the same time, traders expect the European Central Bank to raise its benchmark lending rate next month.

Inflation in the eurozone, which hit an annualised 3.7 percent in May, is at an "unacceptable" level, ECB chief economist Juergen Stark said.

But other ECB officials have dampened expectations the central bank might be preparing for a series of rate increases.

"We see the July rate hike by the ECB as a one-off and so unlikely to be a source of strength for the euro," predicted Kyriakopoulos.

Traders were waiting for earnings results from regional US banks amid fears of subprime-related writedowns.