8 January 2001, 16:03 Forex: Dollar higher in midday London trade on U.S. equity futures
LONDON (AFX) - The dollar moved up in midday London trade, with
expectations that Wall Street will open higher helping to encourage
some profit-taking in the euro and to consolidate recent dollar losses,
dealers said.
News that Lafarge is bidding 3.1 bln stg for Blue Circle has also
led to some speculative selling of euro/sterling and provided some
catalyst for the slide in the euro, Standard & Poor's MMS analyst Will
Rugg said.
The dollar's slight correction is largely expected to be
short-lived, however.
The more bearish outlook for U.S. growth and the prospect for
aggressive interest rate easing in the U.S. against the prospect of a
neutral stance for the European Central Bank -- or at least a much more
modest easing stance -- means that the dollar is still vulnerable to
further pressures, Rugg said, adding that these factors are likely to
continue to weigh on the U.S. currency for the next six months.
The current bullishness in U.S. equity futures is in part due to
the aggress ive talking-up of tax cut plans under the new Bush
administration by Bush's main economic advisor Lawrence Lindsey and to
support by the IMF of the plans, but these plans are likely to come up
against some opposition among moderates in Congress, Rugg said.
"Although it is likely that there will be some tax cuts, the plans
are likely to be scaled back and by the time they are implemented it
will probably be too little too late for them to have any real impact
on medium-term growth rates", he said.
The yen also picked up slightly, though this recovery is also
expected to be short-lived.
The Japanese currency is the biggest loser amid the current
pessimism surrounding the U.S. economy, with Japan's reliance on
exports making it less able to weather the storm in the event of a
recession or a hard landing in the U.S., Rugg said.
He added that he expects dollar/yen to rally towards 117/118 over
the next month or so and that there is scope for euro/yen appreciation
towards 115 over the next three months.
Sterling is expected to hold up more in line with the euro than the
dollar. Rugg noted that he expects the Bank of England to cut interest
rates by just 50 basis points over the course of the year and that move
is not expected until after the budget in March.
The fact that cable held above 150 on the weekly close last week
for the first time since August is a "pretty technically bullish
signal" and it is likely to move back into the 150-155 range for the
moment, he said.
"Although historically the UK economy has tended to move in line
with the U.S., in this case the specific circumstances in the U.S.
which have led to a slowdown are not ones which affect the UK."
The major factors causing a slowdown in the U.S. have been the
bursting of internet bubble and the consequent sharp drop in equities,
especially the Nasdaq, and the link with these factors and the
so-called wealth effect in the U.S. is much greater than in the UK, he
said.
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