LONDON, Jan 13 - The euro held around a cent below the previous day's record high against the dollar on Tuesday after a warning shot from European Central Bank chief Jean-Claude Trichet helped take the steam out of its rally. The market was now waiting to see what hints Federal Reserve Chairman Alan Greenspan would give about the U.S. economy and the outlook for interest rates at a Berlin event later in the day. Trichet's warning on Monday that 'brutal' foreign exchange moves were unwelcome knocked the euro back from a record peak around $1.2898 , braking a rally of around 13 percent since early November. "Trichet used an international forum to express his concern. That injected some caution in the market and people are wondering how the G7 (Group of Seven) will react to the dollar's fall at its February meeting," said Marvin Barth, global currency economist at Citibank.
By 1045 GMT the euro was holding around $1.2743, steady on the day. The dollar stood at 106.50 yen , confined to a narrow trading range by market nervousness that Japanese authorities could intervene again to curb yen gains. The Bank of Japan was detected intervening heavily last week, although there was no official confirmation the authorities had taken action.
TWO-WAY RISK RETURNS
Now the ECB has made its displeasure clear over the pace of the euro's rise, analysts said a greater sense of two-way risk had returned to the market and the much-talked about target of $1.30 was no longer a given. "Whether Trichet is complaining or not the euro is overextended and the euro/dollar rally is running out of steam," said Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein in London. "Who wants to go in at $1.28 or $1.27 and put on a big long euro/dollar position? Nobody is going to do that so we're going into profit-taking mode." Donald Johnston, head of the Organisation for Economic Cooperation and Development (OECD) said the main concern was over the speed of the dollar's fall against other currencies rather than the actual level. The OECD has repeatedly said however the dollar has to fall to correct global imbalances. The market is now looking ahead to a Group of Seven finance ministers and central bankers' meeting in Florida in February. Japan and the euro zone have already expressed concerns but analysts doubt the G7 would specifically warn against the dollar's fall as Washington seems relaxed about the currency, given low U.S. inflation and the prospect of a presidential election later this year.
"The consistent message from the U.S. is that for them as long as a dollar decline is orderly it is an unambiguously good thing as inflation is at a 40-year low and falling and depreciation of a currency increases import substitutes (domestic goods)," Barth said. "It will be very difficult to get the U.S. to sign off a statement which tries to stem the dollar decline or, worse, conduct concerted intervention." Investors are on the lookout for any comments from Greenspan relating to U.S. interest rates in light of a much smaller-than-expected rise in December employment figures released last Friday. Fed officials Sandra Pianalto and Mark Olson are also due to speak later in the day.//