22 October 2001, 12:22  Forex - Euro bounces back vs dollar in early trade

LONDON (AFX) - The euro bounced back against the dollar in early trade after German sentiment figures on Friday prompted a hefty slide, but market participants doubt that the recovery will be anything more than short-term. In particular, the euro is suffering badly as evidence accumulates of euroland's subdued economic performance and the European Central Bank's perceived unwillingness to cut interest rates aggressively in response. "The perceived inflexibility of the ECB has not helped the euro's cause," said Merrill Lynch's senior currency strategist Neil MacKinnon. The euro may be helped if the ECB cuts rates at their next meeting on Thursday, but MacKinnon doubts that the recovery will last long. "Speculative traders are still long, though there has been some unwinding of these long-term positions," he said. MacKinnon thinks that the euro could fall to around 0.8850 usd as these long-term positions are unwound. BNP Paribas' senior currency strategist Ian Stannard thinks the ECB may decide to postpone an interest rate cut they may have had in mind for Thursday, after apparent political pressure at the weekend summit in Ghent, Belgium. "If they are under political pressure, it may make them more reluctant to go now," said Stannard. "They will look to maintain their independence." To the eventual satisfaction of ECB President Wim Duisenberg, the EU leaders watered down an original draft statement which said rates could be cut, to one suggesting that a fall in inflation gives authorities "room to manoeuvre" on monetary policy Duisenberg said this view "is perfectly in line with our monetary policy". Even though a cut may support the euro, Stannard thinks the single currency will be under further pressure as the "focus switches back onto euroland". "With the monetary authorities not taking the same sort of steps as in the US, euroland is lagging," he said. Meanwhile, the dollar remains supported by the market's perception that the massive fiscal and monetary loosening will help the economy bounce back strongly next year. Dealers are also awaiting the release of the Federal Reserve's beige book and upcoming comments from US Federal Reserve chairman Alan Greenspan. However, Merrill Lynch's MacKinnnon cautioned that any bad economic news, particularly on the corporate front, may hit equities and consequently the dollar. Sterling is under pressure and BNP Paribas' Stannard is looking for further losses as the trade positions worsens.

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