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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