25 January 2002, 12:17 Forex - Dollar well bid in early London trade underpinned by Greenspan speech
LONDON (AFX) - The dollar was well bid in early London trade
underpinned by Fed chairman Alan Greenspan's upbeat pronouncements on
the US economy, dealers said.
Greenspan's speech was notable for its lack of emphasis on the
downside risks to the US economy - indicating that the Jan 30 Federal
Open Market Committee meeting will leave interest rates unchanged, they
added.
On the whole, Greenspan's remarks were positive for the euro. "It
was important for the things not said - Greenspan did not dwell on
downside risks. It looks less and less likely that there will be a rate
cut at the Jan 30 meeting," David Mann, economist at Standard Chartered
said.
The net effect was dollar positive although the greenback has come
off highs since Asian trade, he added.
While Greenspan's comments may not have promised smooth sailing,
they have raised market expectations for growth, Michael Klawitter at
West LB said.
He was however more cautious and still expects a 25 basis point
rate reduction next week.
The euro continued to look soft but did not suffer serious damage
from Greenspan's remarks.
Key support is at 0.8730 usd. If this fails, the euro could be in
for a very rough ride, Mann at Standard Chartered said.
The euro did not fall too far as market participants generally
believe most of the negative euro zone fundamentals are already priced
in. However, past experience has taught us that most surprises in the
euro/dollar cross are to the downside, Klawitter at West LB said.
"The likely spike in EU-12 Jan inflation data with Italy cities CPI
today and German CPI next week also point towards caution.
Consequently, risks in euro-dollar remain to the downside," he said.
The CPI data will be the first official indication whether the
transition to euro notes and coins has had an impact on prices.
Elsewhere, the yen was steady in the mid 134 region against the
dollar although the general trend of yen weakness has not changed.
Deflation continues to accelerate, with Tokyo registering the
lowest rate for 30 years, reminding the market that monetary policy
will remain extremely easy, driving the yen lower, Klawitter said.
Sterling was also easier, on the back of the dollar's overall
strength.
The UK's fourth quarter GDP data due out at 9.30 will be a key
factor for sterling. Given that the market has priced in a weak
outturn, a slightly better showing may push sterling higher, Mann at
Standard Chartered said.
The AFX median of analyst forecasts put quarter-on-quarter growth
at 0.2 pct for a 1.8 pct year-on-year gain. But some economists predict
flat quarterly growth as retail sales slow and the manufacturing sector
continues to perform dismally.
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