28 June 2001, 17:26  FOCUS: Leading currencies look set to range-trade after US rate cut

----by SIVAKUMAR SITHRAPUTHRAN----
LONDON (AFX) - Leading currencies look set for a period of range-trading in the immediate future despite signs that the US may be nearing the end of its easing cycle, according to City economists. They also said the European Central Bank rate cut that is predicted for next month is unlikely to lend the euro much support as, in the words of one economist, such a move may be "too little too late".
The economists said that the Federal Open Market Committee's 25 basis point cut last night, while mildly disappointing to market participants, produced no great currency shocks today. Concerns remain however as to whether a recession has been averted, they said.
Standard & Poor's MMS strategist, Will Rugg, said the US is now at a critical stage where the aggressive initial rate cuts should take effect. If they do, the dollar could show a more positive turn, he said.
Rugg said that for now, the dollar is well underpinned but if in the months ahead there is no discernible improvement on the data front, there could be cause for serious concern, he said.
Until then, he predicted, currency markets will be in a "stalemate". Prevailing caution will limit any propensity to buy dollars aggressively, he said, adding that the summer lethargy may also dampen trading volumes.
On a more positive tone, he said Nasdaq has, "absorbed several weeks of profit warnings and not done too badly either - this bodes well for the dollar."
Turning to yesterday's US rate reduction, Rugg noted that the Fed did not really justify the size of the cut. "They left a lot unsaid but the smaller cut speaks for itself - that the US is nearing the end of the easing cycle," he said.
He said that while the dollar was not harmed at all, there was some volatility in the US Treasuries yield curve.
He said that on a balance, the status quo remains. The dollar is well underpinned, especially against the weak sentiment on the euro and the yen.
However, Standard Chartered economist Razia Khan cautioned that despite the muted initial reaction to the Fed decision, the markets may see things differently following the release of next week's key National Association of Purchasing Managers and nonfarm payroll figures in the US.
Meanwhile, the euro was softer in the wake of the US rate cut but remained above 0.85 usd.
The single currency rose slightly when European Central Bank president Wim Duisenberg said yesterday that its weakness has come to an end, even if most analysts saw the comment as wishful thinking. "He was leaping to conclusions that the rest of the market does not necessarily share. It was premature. Perhaps he was trying to provide verbal support," Rugg at MMS said.
Lehman Brothers economists noted that comments from Bundesbank president Ernst Welteke today gave the clearest arguments yet for a rate reduction.
Welteke said inflation figures from the euro zone show price pressures have already started to moderate this month, while money supply data does not point towards prices rising in the medium term. "The critical question is whether he can persuade his other central bank colleagues to approve a cut - especially the representatives from the higher-growth peripheral countries. This will ensure some suspense even if the risks are clearly weighted towards easing for us," Lehman Brothers economists said in a research note.
However, Rugg, at MMS, said that even though the ECB looks likely to cut rates by another 25 basis points before the summer recess, such a move may be "too little too late".
Currency dealers warned that, quite apart from interest rate considerations, the euro may come under pressure from a resurgence in mergers and acquisitions activity.
Elsewhere, Japan's weak economic fundamentals continue to weigh on the yen, although its slide has been gradual and is likely to remain so as long as the threat of central bank intervention remains, dealers said.

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