26 October 2001, 14:41  FOREX-Dollar pauses for thought after recent rally

By Dhara Ranasinghe
LONDON, Oct 26 - The dollar softened against the euro and the yen on Friday, clipping steady gains made in the past week on renewed optimism over the U.S. economy.
In recent days, the dollar has risen to six-week highs against the euro and 2-1/2 month peaks versus the yen on the view that aggressive U.S. interest rate cuts and heavy fiscal stimulus have paved the way for an economic recovery.
Wall Street staged a turnaround on Thursday, with the Dow Jones industrial average <.DJI> registering its strongest finish since the day before the September 11 attacks, offsetting the impact on the dollar of weaker than expected durable goods and existing homes data.
But pre-weekend profit-taking dimmed the geenback's shine on Friday.
"The dollar is softer today, partly due to the fallout from yesterday's weak data and a correction from very sharp gains seen earlier this week," said Mitul Kotecha, head of currency research at Credit Agricole Indosuez in London.
"But the dollar is supported by optimism over the U.S. economy which has been seen in equities."
At 0940 GMT, the dollar was trading near the day's lows around 122.55 yen , more than half a yen below 2-1/2 month highs set on Thursday.
Against the euro, the dollar stood around $0.8935 , down slightly on the day and nearly a cent below six-week peaks set earlier this week.
EURO ON BACKFOOT
The euro was weaker around 109.50 yen , down about a third of a percent from late New York levels.
Some dealers said disappointment in the European Central Bank's failure to deliver a growth-supportive rate cut at its meeting a day earlier could undermine the euro in the near term.
ECB council member and Bundesbank President Ernst Welteke defended the bank's decision in an interview with Germany's Die Welt daily, saying the bank's independence should not be questioned.
He added political pressure would not spur a cut in rates. Eurozone politicians have been urging the ECB to ease monetary policy in the face of slowing economic growth.
ECB council member and Bank of France Governor Jean-Claude Trichet echoed that sentiment, saying in a radio interview on Friday that the ECB had a duty to retain its independence in the face of political pressure.
"The dollar is today staging a correction within a new trend," said Jim Webber, chief economist at TD Securities.
"There has been a return to favour for the dollar, because of the positive perceptions of Fed action and on the fiscal front -- Japan is still mired in recession and the ECB declined to cut interest rates yesterday."
The euro was steady after euro zone M3 money supply data showed the three-month moving average rate at a higher than expected 6.9 pct in September, against a previous rise of 6.5 percent.
Sterling rose across the board on news that the British economy grew a preliminary 0.6 percent in the third quarter, above expectations of a 0.4 percent increase.
The pound stood near the day's peaks around $1.4335 , up almost half a percent on the day.
JAPAN WOES
Dealers said that while the yen looked perkier, the Japanese currency was in no position to capitalise on any dollar frailty following the latest set of dismal economic data from Japan.
Japan's consumer prices fell 0.8 percent in September from a year earlier, a 24th straight month of decline. Separate numbers revealed that retail sales showed a fresh dip.
The data came a day after Japan's government and central bank said they were preparing bearish economic forecasts to reflect the global slowdown exacerbated by last month's air attacks on the United States.
The Bank of Japan will hold a regular policy-setting meeting on Monday, but it looks likely to hold back on making any move as it waits for the government to play its part in rescuing the recession-bound economy.

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