21 January 2004, 16:56  Dollar holds near lows, market mulls ECB stance

LONDON, Jan 21 - The dollar hovered near the previous session's lows on Wednesday after a two-cent hammering against the euro on Tuesday as the market tried to gauge the European Central Bank's reaction to further euro strength. The euro began the European session with a brisk rally to within 2-1/2 cents of a record high but later pared its gains in thin, volatile trading, while sterling and other major currencies also kept the greenback under pressure. After ECB chief economist Otmar Issing hinted on Tuesday that the euro strength was not a one-way street and rates were unlikely to be cut, council member Nout Wellink reinforced the message that foreign exchange moves "can't be neutralised by minor changes in rates". "They aren't going to cut rates in the near term just because the currency is at a strong level. That's a very clear message," said Mansoor Mohi-uddin, chief currency strategist at UBS in London. "The market has now picked up on that and that's why the euro is now higher than we were yesterday." By 1310 GMT the euro was a quarter percent firmer on the day at $1.2612 having rallied all the way to $1.2673 earlier. It has gained nearly three cents since early Tuesday.
INTERVENTION LEVER
The euro turned tail from record peaks last week after European Central Bank President Jean-Claude Trichet spoke out about "brutal" currency moves and excessive volatility. Euro zone finance ministers voiced concern about currency market volatility in a statement on Monday but failed to outline steps to curb the pace of the euro's recent rally, leaving the market unimpressed and sending the euro up sharply. "Markets will push the euro higher to find where the real action is rather then verbal comments," a trader at a UK bank said. "Wellink poured a dampener on rate cut expectations. Intervention is now the likely form of response. But the ECB does not want to be perceived as having a line in the sand." Wellink said also the euro's rise against the dollar was not excessive, there was no need to take special measures at a February Group of Seven meeting and that a repetition of a statement from last September's Dubai meeting was not necessary. At Dubai, G7 ministers called for more flexible exchange rates, a call the market perceived as aimed at Asia but which, in the weeks which followed, drove the dollar down against the euro. In Germany, foreign trade association (BGA) head Anton Boerner said the euro's current level did not threaten German exporters and he did not see the need for intervention. News that euro zone inflation fell back towards the ECB's comfort levels in December, to two percent, had little immediate impact on the euro but analysts noted this would make it easier for the ECB to take action to counter euro strength.
STERLING POWER
Sterling pushed back within sight of last week's 11-year peaks against the dollar after staging its sharpest one-day rise on Tuesday in nearly nine years. Minutes from the Bank of England's January 7-8 meeting highlighted the possibility for higher interest rates in Britain. Although the Monetary Policy Committee voted 8-1 to leave rates steady, it said the global economy and domestic demand were both stronger than forecast in November. The dollar was steady at 106.98 yen with ever-present wariness of Japanese intervention preventing more dramatic losses in the greenback. U.S. President George W. Bush's State of the Union address made few ripples in the market, although dealers noted that his appeal for tax cuts to be made permanent boded ill for the U.S. budget deficit and hence the dollar.//

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