28 June 2001, 13:00  Forex: Euro slightly weaker as Fed rate cut seen positive for dollar

LONDON (AFX) - The euro was slightly weaker in early London trade after the US Federal Reserve's 25-basis-point cut in interest rates was viewed as moderate and not inflationary, and therefore dollar supportive, dealers said.
One factor limiting the reaction to the smaller-than-expected move was the Fed's statement, which leaves the door open for further rate cuts, they added.
"Some in the market were expecting a 50-basis-point cut, and this is pretty much a reaction to that," said Michael Klawitter, a strategist at West LB Panmure.
"The market had priced in a probability of 40 pct for a 50-basis-point cut, and 60 pct for a 25-basis-point cut," he said. He also pointed out that a US rate cut is seen as a direct step supporting US economic recovery, in turn helping the dollar across the board.
Standard Chartered analyst Razia Khan said the reaction to the rate cut was surprisingly muted.
The Fed's statement accompanying the cut leaves the possibility of another reduction very much open. "The message was that they will come through if needed," she said.
Dealers also noted that the euro failed to benefit from comments by Bundesbank president Ernst Welteke overnight that Euro zone inflation data for June show moderating price pressures.
Klawitter, however, believes the bias for the euro's price against the dollar remains on the upside, especially given the sharp drop in crude oil prices yesterday.
"Crude prices are highly correlated with the dollar price, and therefore the weak oil prices are supportive for the euro," he explained.
Klawitter expects a normal day, with the euro-dollar staying within a trading range of 0.8550-0.8610.
Sterling meanwhile was higher against the euro, but lower against the dollar, driven by technical factors.
"The demand is generally short sterling versus euro, but also short cable, and therefore some short has to be covered, and consequently you see euro-sterling moving lower," Klawitter said.
Meanwhile, economic data out today is expected to have little impact, dealers said.
"There were no surprises in the French business confidence indicator, and no surprises are expected from the US weekly jobless claims," Klawitter said.
"As a whole, we still remain in a narrow trading range, and the market is clearly lacking direction," he added. The yen remains under pressure amid continually weak Japanese data that means the 125-yen level against the dollar is likely to be tested, Khan at Standard Chartered said,
Only the threat of intervention is keeping the yen underpinned, she said, adding that any decline of the yen is more likely to be gradual.

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