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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