17 October 2001, 17:20   Dollar supported by ECB inaction, other background factors

By Allen Sykora
Chicago, Oct. 17 (FWN) - The U.S. dollar is continuing to draw support against the euro due to the European Central Bank's reluctance to trim interest rates and disagreement on the European continent over how to go about handling the economy, analysts said.
Sources say the dollar is not being lifted this morning by any specific fresh news but instead by a combination of background factors. Other influences giving the dollar a boost are perceptions that the U.S. military campaign in Afghanistan is going well, expectations for market- friendly comments by Federal Reserve Chairman Alan Greenspan today and early signs that IBM's earnings report will help boost equities, contacts said.
The euro has fallen to 90.34 U.S. cents from 90.79 in late-Tuesday North American trade. The dollar has upticked to 121.37 yen from 121.30 late Tuesday.
"It's because of a combination of things; there's not any real specific news story we can point to," said David Gilmore, partner with Foreign Exchange Analytics.
"In general, the markets are eyeing the U.S. military action in Afghanistan as going well. There are expectations that Greenspan will have encouraging words for U.S. markets (when he appears before the Joint Economic Committee of Congress this morning). People are looking at the idea that the IBM announcement yesterday will help U.S. stocks."
After the close, IBM reported that third-quarter earnings were down from a year ago, but at 90 cents a share, they topped the First Call estimate of 89 cents. Meanwhile, the company indicated that current consensus estimates for the fourth quarter are "reasonable." Ahead of the open on Wall Street, the stock-index futures are higher in early trade. Frank Pusateri, vice president of corporate foreign exchange with Mellon Bank, also commented that stocks should help the dollar. "We had some decent performances in the stock markets overseas, and I suspect we'll have another good day on Wall Street today," he said. "So we'll probably see the dollar supported a little bit." Then there's the situation in Europe, where the ECB opted last week not to trim interest rates. Even ahead of the Sept. 11 terrorist attacks, analysts had been lamenting the fact the ECB was not as willing as the Federal Reserve to try to jump-start the economy, more worried about holding down inflation instead.
"There is growing cynicism about the policy mix in the euro zone," said Gilmore. "The governments want the ECB to ease and the ECB doesn't. And governments are threatening fiscal stimulus, which puts the stability pact at risk."
Pusateri related that the market is watching to see how much the economic slowdown in the U.S. weighs on the European economy, particularly after the Sept. 11 terrorist attacks on the U.S.
As for the ECB's lack of action on the interest-rate front, Pusateri continued: "It's like every time they get a chance, they never miss an opportunity to miss an opportunity. If anything is weighing on the euro, that's it more than anything."
The ECB not only left rates on hold last week, but several members - including President Wim Duisenberg and ECB member/Bundesbank President Ernst Welteke - have suggested there is no reason to change policy, saying rates are already low and appropriate. "The markets are looking at the (economic) downside risk as being pretty significant right now, with the ECB not responding," said Gilmore. "That's not good for the longer-term economic prospects for the euro zone. "At the same time, the European governments are looking at their tax-receipts decline as the economy slows and anticipating more government outlays as unemployment rises. They're growing as frustrated with the ECB as the markets are."
Therefore, he continued, these governments are contemplating fiscal-stimulus measures, with some announced in France on Tuesday. The market's worry about this, though, is the potential impact on the stability pact on fiscal austerity that binds the European nations together for a common currency. He related that austerity "has always been a problem" on the continent.
"One of the things that the European members had hoped to do to prevent the ongoing problems in the euro zone was to keep fiscal policy in check, even though they didn't have one political government and budget," said Gilmore.
Overall , said Pusateri, "there's not a lot of real action going on" the foreign-exchange market. But then, he said, "maybe that's a good thing" considering some of the geopolitical worries around the globe as the U.S. continues to target Taliban military sites and terrorist camps in Afghanistan in retaliation for the Sept. 11 attacks on the U.S. Over the next week or so, Pusateri said, he looks for the euro to be in a range of 90 to 92 cents and for sterling to be in a range of around $1.44 to $1.47. Dollar/yen can be expected to move between 120 to 122 yen, he added.
Meanwhile, Gilmore commented that dollar/yen's recent strength is in part because little investment flows are going into Japan. "There's no place to put it," he said. "Nobody wants stocks, and JGB (Japanese government bond) yields are unattractive ... Japan is just not a destination for global capital."

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