4 August 2003, 14:00  FOREX- Dollar soft as markets scrutinise recovery quality

LONDON, Aug 4 - The dollar edged away from last week's two-week highs against the euro and three-month peaks against the yen on Monday as mixed signals on the U.S. economy further increased uncertainties over recovery prospects. U.S. data last week showed that strong defence spending fuelled second quarter growth, the industrial sector continued to expand, unemployment fell for the first time in over a year and a rise in consumer sentiment outstripped expectations. But non-farm payrolls fell, marking the sixth consecutive month that the economy has shed jobs, when economists forecast a gain. "There is clearly evidence of growth in the United States which is supportive of the currency, but the quality of growth is poor and the need for funding is significant, that's why we have ongoing tension in the market," said Paul Lambert, head of currencies in Deutsche Asset Management. By 0935 GMT, the dollar stood at $1.1301 per euro having risen to $1.1131 in volatile trade on Friday. Against the yen it also edged away from Friday's three-month highs of 120.69 to stand at 119.98. The euro was a touch firmer at 135.64 yen
Trading was confined to narrow ranges in Asia and early Europe as traders avoided taking large positions ahead of Japanese summer holidays next week and as many Japanese exporters have completed shedding dollar holdings for now. "All eyes are on the U.S. side now so it's hard to move in Tokyo. Dealers will start taking holidays and companies will be on holiday, too," said a dealer at a major Japanese bank. "On the (dollar's) downside there are fears of intervention and on the upside dealers have confirmed that there's a strong barrier, so dollar/yen will be sandwiched and stay rangebound." No major economic indicators are due from the United States on Monday, keeping investors focused on the equity markets. Tokyo stocks shed 1.65 percent but European stocks erased early gains. U.S. stock futures are up by around a third of a percent, pointing to a firmer opening on Wall Street later. "The worst for the U.S. economy is clearly over. But market players don't know if recovery is sustainable," said Kota Kimura, assistant FX manager at Shinkin Central Bank in Tokyo. Later in the week U.S. and European service sector surveys are scoured for clues on the pace of recovery on both sides of the Atlantic. Central banks in Australia, Japan and Britain are due to discuss monetary policy this week but none is expected to change interest rates.

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