7 August 2003, 14:21  Dollar stays off lows pre-auction caution

LONDON, Aug 7 - The dollar held above recent one-week lows on the euro on Thursday after a successful U.S. Treasuries sale cheered stock and bond markets, but nervous anticipation ahead of another auction kept a lid on optimism. Wednesday's sale of about $18 billion in five-year bonds saw the strongest bid-to-cover ratio since August 2000 and helped calm fears that a debt market selloff could raise borrowing costs and choke off an economic recovery in the world's biggest economy. But nervousness ahead of the Treasury's 18.0 billion in 10-year notes at 1700 GMT -- the final leg of its $60.0 billion quarterly refunding -- delayed any sustained dollar recovery. "Everyone is going to be watching this afternoon's auction," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez. "After yesterday's positive result the expectation has been built in that we could see another good outcome from today's auction, which should be more positive for the dollar." By 0950 GMT the dollar was weaker on the day against the euro at $1.1365 having recovered to $1.1322 after the auction from one-week lows of $1.1427.
DATA DUE
Before the auction, U.S. weekly jobless claims are due at 1230 GMT. The data is expected to show a rise to 395,000 in the week ended August 2, still below the key 400,000 mark. U.S. second-quarter productivity, due at 1230 GMT, is expected to rise 4.1 percent while unit labour costs are predicted to have fallen 1.0 percent. "It's the key day for data releases this week," said Kotecha. "There's a little bit of risk on the jobless claims, but productivity should be very firm." Treasury data on Wednesday showed indirect bidders, the bulk of which are central banks, took $5.8 billion of the new notes while primary dealers got $11.88 billion, a much lower proportion than in the three-year sale. Given the bulk of financing for the U.S. current account deficit comes through bonds, the dismal sale of three-year notes on Tuesday raised concerns about the United States' ability to attract capital once the economy starts to pick up. Wednesday's more successful auction cheered equity investors who were worried about higher interest rates. However, U.S. stock futures were pointing south in European mid-morning, making it difficult for the dollar to gain much traction against the euro. "Encouraging results yesterday reduced risk of a sharp fall in Treasuries and also eased concerns about higher interest rates, but markets are nervous ahead of the next auction," said Philippe Mayer, foreign exchange strategist at Societe Generale. Meanwhile, the European Central Bank said there were increasing grounds to expect euro zone economic recovery to take hold this year and build next year.
TAKENAKA, SNOW MEETING
Japan's Ministry of Finance said it spent 4.6116 trillion yen on intervention in the April-June quarter to stem the yen's rise. The quarterly figure, equivalent to $38.36 billion at current rates, was the biggest since Japan began releasing figures in 1988. Another focus is whether Japanese Economics Minister Heizo Takenaka, in Washington to meet U.S. policymakers, will discuss foreign exchange with U.S. Treasury Secretary John Snow in a meeting scheduled for later on Thursday. Snow said last month that he would not criticise Japan's intervention, softening suspicions in the market that he was against Japan stepping in to weaken the yen.

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