TOKYO, Jan 21 - The dollar erased most of its earlier losses against the euro in choppy trade on Wednesday as dealers could not make up their minds whether the greenback's recent rebound had come to a halt. "The market wants to see if the euro can hold its momentum and keep above $1.26 after seeing such a strong rise yesterday," said Katsunori Kitakura, manager of the treasury department at Chuo Mitsui Trust and Banking. "It's hard to make any decisions until we see how it (the euro) performs in overseas markets today." By 0640 GMT, the euro was back at $1.2595/99 after jumping half a cent to a session high of 1.2630 on options-related buying. It stood at 1.2576/82 in late U.S. trade on Tuesday. U.S. President George W. Bush's State of the Union address provided little fresh incentive to the market. Some traders said the dollar could rise further against the yen, saying the market had yet to adjust its huge dollar short positions. "I think there is a possibility that it could move to 108-109 yen rather than slip back to the 105-106 level," said Jun Kitazawa, assistant vice president of the forex section at Brown Brothers Harriman in Tokyo. Following steep falls in the dollar against major currencies on Tuesday, the U.S. currency slipped to a session low of 106.84 yen but soon recovered above 107 yen on light bargain hunting, traders said. The dollar was at 107.19/24 yen , up slightly from 107.03/11 yen in late U.S. trade.
VERBAL WARNINGS
On Tuesday, the dollar tumbled roughly two percent against the single currency and 2.2 percent against sterling and the Australian dollar. A statement after a meeting of euro zone finance ministers and the European Central Bank (ECB) late on Monday avoided the usual wording of wanting a strong and stable currency, stressing instead discontent about the pace of euro gains after it hit record highs near $1.29 last week. But players, who had expected the ECB to sound stronger warnings about the euro's strength, took this as a greenlight to buy back the single currency. On Tuesday, ECB Chief Economist Otmar Issing said Europe's economic recovery remained on track despite some dampening effect on exports from the stronger euro. He also indicated that interest rates would probably remain stable at 2 percent for the time being since inflation would likely fall this year even as growth accelerates. Some traders were looking ahead to what might emerge from Thursday's ECB governing board meeting, although no interest rate announcement is scheduled. Dealers noted a warning from an influential British parliamentary committee, which said the dollar's slide in recent months could derail the global economic recovery. But many traders expect trading to be range-bound ahead of a key Group of Seven finance ministers' meeting early next month. "The market needed to adjust piled euro-long positions ahead of the G7 and now that it has readjusted, I think it will stay near current levels until the meeting," said Brown Brother's Kitazawa.//