LONDON, Jan 8 - The dollar won some respite against the euro on Thursday as nervousness the European Central Bank might signal concern over the euro's record-breaking rally prompted investors to reduce bets on the greenback's slide. The ECB is expected to leave interest rates unchanged at Thursday's policy meeting and the market focus is on whether bank chief Jean-Claude Trichet will use a news conference at 1330 GMT to signal a shift in his hitherto relaxed attitude to the euro's rise. The euro has leapt more than 10 percent against the dollar in the past two months, bringing its gains over the past two years to more than 40 percent. Business groups have warned that euro strength is hurting European exporters and denting growth prospects. "The pace of the euro's advance is such that Trichet will have to say something, but it will be hard for him to deviate too far from his traditional line," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez. "So far, all the bank has said is that a strong and stable euro is in the region's interest." The euro eased to $1.2564 in early European trade, down 2-1/2 cents from record peaks scaled on Tuesday. The dollar was steady near three-year lows around 106.00 yen , with dealers wary of continued dollar-buying intervention by Japan.
JAPAN INTERVENTION WARINESS
Investors suspect the Bank of Japan has stepped up its forays in the market this week to slow the yen's potentially export-damaging appreciation against the sliding greenback. A source told on Wednesday that Japanese authorities poured three trillion yen onto the currency markets in the first two days of this week alone. This compares with 20 trillion yen in intervention through the whole of 2003, a level which was itself a record. "That's an amazing amount," said a dealer at a British bank. The dollar stood at 106.15 yen at 0920 GMT, little changed on the day. It had dipped below 106.00 yen on Wednesday before resurfacing almost instantly in a move attributed to a glitch on the EBS trading system, and banks in Tokyo used 105.90 as the overnight three-year low. Traders suspect the Bank of Japan intervened at around 106 yen in U.S. trade on Wednesday to prop up the dollar. But many doubted for how long Japan would be able to deflect upward pressure on the yen from the dollar's broad-based decline. "They are just conducting a smoothing operation," said Yoshiharu Yanagisawa, vice president at State Street Bank in Tokyo. "It's difficult to contain the yen's rise when global capital is moving away from the U.S. to the rest of the world." Persistent concerns over the health of the U.S. balance of payments have taken a heavy toll on the dollar, which fell around 10 percent against the yen last year and almost twice that against the euro. The U.S. current account deficit is already running at around five percent of gross domestic product and analysts say a strong recovery in the United States may only exacerbate this deficit. The country is also running a large budget deficit. On Wednesday, the International Monetary Fund urged the United States to forge a clear plan to balance its budget, warning that widening fiscal deficits held dangers for both domestic and global growth.//www..com