LONDON, Feb 20 - The dollar extended recent gains versus the euro and the yen on Friday, hitting a six-week high against the Japanese currency as investors snapped up the greenback after months of selling it. While some analysts were sceptical whether this was yet the end of the dollar's two-year downtrend, the euro's inability to hold on to recent record highs meant euro bulls were starting to question its strength to rise much further, at least for now.
As a result, investors were adjusting positions after selling the dollar to a record low of $1.2927 per euro this week. The dollar has gained three cents from the low but it is still 20 cents weaker than a year ago. "We are seeing a broad correction now, which is mainly technical," said Trevor Dinmore, foreign exchange strategist at Deutsche Bank in London. "The price action above $1.29 (per euro) was disappointing and convinced some players that we may not see an immediate move to $1.30." "We had pretty extreme short dollar positions in the market. But this does not alter the fundamental perspective and we remain bearish on the dollar. The correction could go on for several weeks." At 0910 GMT the euro was down 0.5 percent on the day at $1.2652 . It hit day's lows at $1.2622. The dollar was up 0.6 percent from Thursday's closing level in New York, trading at 107.73 yen . It was also almost three percent stronger from three-year lows set around 105 yen earlier this month. The dollar's correction also hit the British pound which stepped further away from 11-year highs set at $1.9140 earlier this week.
BUYING IT BACK
Traders said much of the demand for dollars came from short term players such as momentum and hedge funds. "We're hearing that model funds are buying dollar/yen, and that's leading the way," said one London-based trader. The snowballing position adjustments also prompted some firms that had been beneficiaries of a weak dollar to start procuring dollars with urgency, analysts said. "Yesterday, we were still seeing Japanese exporters selling dollars because they expected the dollar's bounce to be very short-lived. Today they are more relaxed, and importers are being forced to cover their exposures," said Hiroyuki Watanabe, foreign exchange manager at Shinsei Bank in Tokyo. Analysts believe the corrective mood for the dollar began when the European Central Bank started voicing concerns over the euro's rally, warning against excess volatility in currency markets. The single currency is still about 50 percent up from its record lows on the dollar set in 2000. This week, fresh comments from European officials fuelled nervousness that the ECB could intervene by selling euros. However, few analysts expect intervention just yet, although some do not rule it out if the euro approaches $1.30.
UPCOMING EVENTS
Later in the day, U.S. consumer inflation data for January due at 1330 GMT will be in focus. Analysts are expecting a rise in core CPI of 0.1 percent, same as in the previous month, and a 0.3 percent increase in the headline number, up from 0.2 percent in December. Also, U.S. trade chief Robert Zoellick is expected to give a press conference at 0930 GMT in Geneva. Federal Reserve Bank of St Louis President William Poole speaks on the state of the U.S. economy at 1345 GMT and Fed board governor Ben Bernanke speaks at 1745 GMT. Fed Chairman Alan Greenspan is due to speak on education in the economy at 1845 GMT. No question and answer session is expected.//