By John Hardy /*/ Dow Jones Newswires
NEW YORK -- The euro recovered from an early slide in New York, rallying more than a half-cent to highs above 87.00 U.S. cents, then retreated again to finish little changed on the day against the dollar.
The dollar/yen pair declined modestly, largely biding its time ahead of the two-day Bank of Japan policy meeting that begins today and the weekend gathering in Canada of finance ministers and central bankers from the Group of Seven industrialized nations.
The developing foreign-exchange scandal at Allfirst Financial, a U.S. subsidiary of Allied Irish Banks, which acknowledged a loss of $750 million from irregular trading, didn't have a direct impact on currency markets, traders said.
"For the euro, it'll be interesting to see what the Allied Irish situation does," said one trading manager, "You start to ask questions about a whole load of European banks."
For much of the day the market focused on the euro. The single currency fell to intraday lows at 86.35 cents during early New York trading in response to weak euro-zone employment numbers and dollar-supportive U.S. productivity data.
The dollar's strength proved to be brief, however, as a disappointing performance from U.S. stock markets failed to reassure traders that Monday's major equity selloff was a thing of the past.
Yesterday, the Dow Jones Industrial Average stayed in negative territory for most of the day, and was down 27.33 points at 9658.10 at the close, again failing to dispel the gloom gathering around the U.S. corporate sector.
"Initial dollar gains faded," said Alex Beuzelin, currency adviser at Ruesch International in Washington, D.C., "Wall Street was off and there's still a shadow from Enron -- and it provided the market with a chance to consolidate the dollar's gains."
However, Mr. Beuzelin remains confident that the dollar's economic prospects are clearly better than those of its major competitors and he expects the U.S. currency to resume its upmove.
"The outlook for the U.S. economy is relatively bullish and gains by the euro are likely to be limited," he said.
In late New York trading, the euro was at 86.78 cents, up from 86.56 cents in London and about even with 86.77 cents late Tuesday in New York. The dollar was at 133.69 yen, below 133.85 yen in London and lower than 133.92 yen late Tuesday in New York, and was at 1.6962 Swiss francs, down from 1.6975 late Tuesday in New York. Sterling was at $1.4120, down from $1.4153.
While U.S. data yesterday were above expectations, those from the euro zone were disappointing.
U.S. fourth-quarter preliminary productivity came in at a gain of 3.5%, better than the uptick of 3.2% that had been expected.
But German December employment data were weak, with total unemployed rising to 4.29 million from 3.96 million, lifting the unemployment rate to 10.4% from 9.6% the previous month.
The German data were again seen as highlighting the contrast between the flexible U.S. labor market and its inflexible German equivalent.
But, despite yesterday's euro rally, the outlook for the single currency remains bleak and, technically, analysts say, the euro has to hold above support at 86.50 cents to avoid a likely near-term move down to the 86.10 cents area.
The dollar/yen pair retreated slowly yesterday, marking time after its climb of almost two full yen Tuesday.
After peaking at an overnight high of 134.35 yen, the dollar/yen pair lost direction, slipping back below 134 yen and trading in a narrow range for the rest of the day.
But traders noted that the yen moved erratically against the euro, with euro/yen falling as low as 115.27 yen, before recovering -- as the euro gathered strength -- to an intraday high at 116.45 yen.
However, the market remains bearish on the yen, expecting it to resume its long-term downward path, with more evidence yesterday that Japanese officials are happy with a weakening currency.
Vice Finance Minister for International Affairs Haruhiko Kuroda said in an interview in the Yomiuri Shimbun that Japan doesn't plan to "intentionally guide the yen lower to benefit our own economy." He added, "We aren't intervening, and we aren't in a situation where we need to intervene."
While, in the short term traders suggest dollar/yen could test support at 133.25 yen, they also believe that if the dollar can push through resistance at 134.50 yen, a test of last week's highs of 135.20 yen is in the cards.