/www.fxserver.com/ By Burton Frierson
LONDON - The dollar held firm in tight ranges against major currencies on Wednesday, awaiting direction from developments in Iraq for a better view of how long the conflict will last.
The dollar was lifted off one-week lows in New York by reports of a popular rebellion in Iraq's second city, Basra, which might give U.S.-led forces a boost if confirmed, but lack of confirmation meant the market was unsure how to react.
Markets were also waiting for the battle of Baghdad to begin in earnest as coalition warplanes and missiles pounded positions held by Republican Guards defending the approaches to the city on day seven of the war, although this seemed some way off.
"The market is so quiet and not moving because there is so much uncertainty.... People are increasingly reluctant to get involved in (trading on) something unsubstantiated," said Rob Hayward, senior currency strategist at ABN Amro.
"Perhaps the market is leaning more to the side that it is going to be long, painful and hard, though it is not as negative as it has been."
By 3:45 a.m. EST the dollar a fraction firmer on the day at $1.0637 after falling to its lowest levels since the start of the Iraq war on Tuesday.
It was steady on the safe-haven Swiss franc at 1.3849 and a shade higher on the yen at 120.30.
BASRA REBELLION?
The British military said it believed citizens of Basra were rising up against forces loyal to President Saddam Hussein, but an Iraqi minister denied a revolt was under way there and Al-Jazeera television said the city was calm.
Reports about an uprising had injected optimism into the market that the United States was gaining support from Iraqi people, which could make it easier for U.S.-led forces to occupy the capital, Baghdad.
"There was an initial optimism that coalition troops would be welcomed with open arms, only to be followed by worries over a prolonged guerrilla conflict," said Hayward.
"(A popular uprising) would suggest the worst fears of continued guerrilla warfare would perhaps not be born out."
With traders preoccupied with developments in the Middle East, the market reacted little to news that North Korea was pulling out of regular military liaison talks with the United States at the Demilitarized Zone frontier because of annual U.S. military exercises in the South.
"The Iraq situation will be the single most important factor in the currency market for now," said a dealer at a major Japanese bank.
NO UNDUE OPTIMISM
U.S. Treasury Secretary John Snow expressed optimism for the dollar on Tuesday.
"The overall response of the equity markets, the bond markets, the debt markets has been positive," he said. "The dollar has risen, so overall the response has been favorable."
But dealers said the markets were likely to remain nervous at this stage of the war.
"You cannot be too optimistic as the U.S.-led forces still haven't entered Baghdad. In the present mood, the dollar should stay choppy as the market factors in new developments in the war," said Kosuke Hanao, head of currency sales at Royal Bank of Scotland.
However, the dollar still retains some support from worries over possible dollar-buying intervention by the Bank of Japan, especially during the sensitive period leading up to the end of the Japanese fiscal year on March 31.
A strong yen could hurt Japanese exports, a mainstay of the country's embattled economy.