By Sumeet Desai
LONDON, Oct 10 - The dollar held its recent gains against the euro on Wednesday, helped by the perception that U.S. military action against Afghanistan had so far gone to plan, and thus reducing the atmosphere of uncertainty.
The greenback had fallen immediately after the September 11 attacks on the United States as investors flocked to safe havens but traders said the start of raids on Afghanistan had reduced nervousness about holding dollars.
They said the failure of the euro to capitalise further on the dollar's discomfort, nervousness that the European Central Bank may not cut interest rates this week, and a reweighting of the Morgan Stanley Capital International (MSCI) global stock indices, were all dollar-supportive factors.
"The start of the attacks has taken away an element of uncertainty," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi.
"Positions had been building up expecting a depreciation of the dollar. But nothing's happened since the attacks began and they have been relatively successful so those positions are being unwound."
By 1200 GMT, the dollar was trading around $0.9135 to the euro, about a cent lower than its level before the start of military strikes. Against the yen, the dollar fell to the day's lows around 120 , weighed by large sterling/yen sales.
The pound fell more than a yen to around 174 and by around half a percent against the dollar to $1.4515.
UNCHARTED TERRITORY
Traders also pointed out that the effects of the conflict were likely to be felt around the world, not just in the U.S.
"The military campaign has started and this has been more of a relief than anything else. Some of the uncertainty has been taken out of the market," said Kamal Sharma, currency strategist at Commerzbank.
But he said the situation remained very volatile and escalation of conflict or reports of high casualties could easily lead to a further bout of safe haven buying.
Analysts said although it had been well-flagged that the MSCI reweighting would favour the U.S. and British stock indices the most, there could be more flows into these currencies as the November 30 deadline drew near.
"The less benchmark sensitive funds may have already changed but other more sensitive funds might still be waiting to leave it as close to November 30 as possible," said Halpenny.
Analysts said the market was now looking for new direction with little slated on the calendar until Thursday's meeting of the European Central Bank and a slew of U.S. data after that.
Although analysts said ECB President Wim Duisenberg's weekend comments had reduced expectations of an imminent cut in interest rates, they said monetary easing was still possible.
"You can't rule out a rate cut tomorrow," Michael Metcalfe, currency economist at Credit Agricole Indosuez.
Traders said a quarter-point cut in ECB rates could be euro positive but keeping rates unchanged could see the single currency sell off and even test support at $0.9080.