22 October 2001, 15:09  Forex - Euro slightly higher in midday trade but still under pressure

LONDON (AFX) - The euro was slightly higher in quiet midday trade but market participants said the currency remained under heavy pressure from the unwinding of long positions and worries about the state of the euro zone economy. However, they added that there is little enthusiasm to buy the dollar, given the near-term economic, political and military uncertainties. One dollar uncertainty relates to the raft of US corporate news this week, from the likes of Compaq, Lucent Technologies and American Express. Disappointing news could trigger a slide in equity markets and damage the dollar in consequence, dealers noted. Paul Mackel, forex strategist for Dresdner Kleinwort Wasserstein, said the euro will continue to be undermined as long euro/dollar positions get unwound. Euro/dollar could dip to be below 0.8900 usd in the coming weeks, he said. However, market participants remain cautious and the euro could be bid up if anything really bad on the anthrax front happens, he said. Mackel expects the European Central Bank to cut interest rates by 25 basis points after Thursday's meeting taking the refi rate to 3.5 pct. He said any delay would further damage the ECB's credibility, which is "already in tatters". BNP Paribas' senior currency strategist Ian Stannard thinks the ECB may decide to delay until its first meeting in November so it can offset charges that it is being pressured by European leaders into cutting rates. "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 agreed at the Ghent summit to water 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 Nevertheless, Barclays Capital's currency strategist Jane Foley, thinks the euro will remain under severe pressure against the dollar whatever the ECB decides given the state of affairs in Europe. "The growth outlook is very miserable," she said. 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. Foley noted that the US is planning to inject some 200 bln usd, or 2 pct of GDP into the economy. That compares favourably with the euro zone, which is constrained by its budgetary difficulties.

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