LONDON (AFX) - The euro strengthened slightly in early trade from afternoon Tokyo levels, on continuing concern over how badly the US economy has been damaged by terrorist attacks, dealers said. They said there are also nerves ahead of the reopening of the US equity markets later today.
"I think the market is still trying to come to terms with what has been happening over the past few days so the rise (in the euro) is understandable," Neil Parker, a currency strategist at Royal Bank of Scotland (RBS), said.
"But if it continues up it could trigger intervention to staunch the dollar slide," he added.
Michael Klawitter, a currency strategist at West LB said: "The market focus will be on the opening of the US equity market, which serves as a barometer for general market sentiment. While a sell-off is inevitable, the Fed as well as other market participants are likely to do all they can to stabilise sentiment given the substantial implications of equity prices on consumer confidence. This leaves the door wide open for an inter-meeting rate cut and we do not expect stock prices to move into free fall."
"Judging from the sharp rise in gold and oil prices on Friday and the subsequent sell-off in the dollar, the forex market may already have priced in most of the action in equities today, which should help to stabilise the dollar around current levels in the very short run. However, looking further down the road, the ongoing high level of global risk aversion should keep the pressure on the dollar as doubts about the US' ability to finance their current account deficit will run high," he added
The yen was slightly stronger as the impact of intervention by the Bank of Japan (BoJ) wore off, dealers said.
"The yen has been pushing back higher, but has been much higher than this recently. The Ministry of Finance is determined to stop the sell off in the dollar," Parker said.
"As far as the dollar is concerned, it will trade flat to slightly lower over the next few weeks. What will be important is how the US stock market reacts after having been open for a while," he added. Klawitter said the BoJ intervened on its own as the dollar-yen struggled to hold the 117 level.
"Further intervention is to be expected ahead of the end of September as capital repatriation plus dollar weakness will keep the yen well supported," he said.
Sterling largely tracked but lagged the euro with no domestic news to trade on.
"Sterling is following the euro and the general tide. There are concerns that the fallout from the US will hurt the global economy and impact on the UK manufacturers even more," Parker at RBS said. Parker said news that the Federal Reserve and the Bank of England have established a temporary 30-bln-usd swap facility, had no impact on the market.
"The swap facility is basically an emergency measure to provide liquidity," he said.
Klawitter at West LB said safe haven flows will keep the Swiss franc on a strengthening trend. "Besides its natural safe haven role, the Swiss franc also benefits from Switzerland's huge current account surplus," he said.