The dollar was firmer ahead of Tuesday’s Federal Reserve interest rate decision, helped by the fall in oil prices.

Oil fell by $6 a barrel yesterday to trade around $120. This has weighed on commodity currencies and supported the dollar and yen, which gain from the favourable changes in terms of trade caused by falling commodity prices.

“Falling commodity prices are certainly adding weight to the dollar’s recent gains,” said Gary Thomson, head of sales trading at CMC Markets.

“Oil prices may now be moving into an established downward trend as inventories build, demand — particularly in the U.S. is tailing off and perhaps most significantly some are realizing that the speculative run higher for crude could be at an end,” he added.

The U.S. currency was also gaining on expectations the Federal Reserve Open Market Committee will release a hawkish statement to accompany Tuesday evening’s interest rate decision. The central bank is widely expected to leave borrowing costs unchanged but is expected to sound a clear warning bell about the risk of rising inflation.

Several Federal Reserve members have recently signalled they would prefer a more aggressive approach to contain inflation, although other members are likely to be more concerned by the state of financial markets.

“Only a more aggressive rate outlook will allow Bernanke to rein in possible dissenters and to convince them to vote for unchanged rates,” said Commerzbank analyst Ulrich Leuchtmann.

Meanwhile, the euro was also weighed on after the final reading of the euro zone service sector PMI confirmed activity contracted for the second month running during july.

The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from banks to cafes, fell to 48.3 from 49.1 June, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction.

Although in line with consensus forecasts it provides worrying evidence for the European Central Bank, coming just days after data showed the manufacturing sector also put in its worst performance in five years.

“The sharper contraction in service sector activity in July adds to the mounting evidence that the euro zone economic downturn is deepening,” said Howard Archer at Global Insight.

At 0843 GMT, the euro was trading at $1.5501 having been at $1.5535 at 0435 GMT earlier this morning.

The pound was steady after figures showing a bigger than expected fall in industrial production were offset by a stronger-than-expected service sector PMI survey.

The Office for National Statistics said manufacturing output fell by 0.5 percent in June from May following a 0.5 percent fall the previous month. The reading is way below the consensus forecast of analysts polled by Thomson Financial News for output to rise by 0.2 percent

However, the The Chartered Institute of Purchasing and Supply/Markit’s headline PMI index for the service sector rose to 47.4 in July from a seven-year low of 47.1 in June.

That was the third consecutive reading below the 50 mark which divides expansion from contraction but above the consensus forecast of 46.7.

The news is unlikely to alter expectations that the Bank of England will keep interest rates on hold at 5.00 percent when the Monetary Policy Committee meets later this week.

At 0840 GMT, the pound was trading at $1.9551, having been at $1.9591 at 0435 GMT. The euro was trading at 0.7924 pounds, having been at 0.7926 pounds at 0435 GMT.

Source: http://www.afxnews.com

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