The dollar held firm on Friday, sitting near one-month highs against the euro and three-month peaks versus the yen hit the previous day amid speculation that Europe may move to curb the strength of its currency. European policy makers' growing discontent with the euro's strength, coupled with the dollar's recent muscle, made market players nervous about holding the single currency, once the darling of the market because of its high yield. "With Japan conducting yen-selling intervention and a series of European officials starting to verbally intervene to weaken the euro, dollar-short positions may be rolled back," said Mitsuru Sahara, vice president of UFJ Bank's forex dealing group.
By 0600 GMT, the euro had eased slightly to $1.2435 from around $1.2445 in late U.S. trade. It was nearly four percent down from life highs hit last week, sitting barely above its trendline from the September low of $1.0760 to the four-week low of $1.2382 hit on Thursday. Against the yen, the dollar was little changed around 109.45 yen . It was just shy of Thursday's high of 109.84 yen, the highest since December 2, and up four percent from three-year lows hit earlier this month. Thursday's rise in the dollar was partly driven by speculation that the European Central Bank (ECB) may cut interest rates next week after German Chancellor Gerhard Schroeder on Wednesday urged the bank to do so to help exporters. His comments were echoed by French Prime Minister Jean-Pierre Raffarin, who said on Thursday he shared Schroeder's view on European interest rates and that currency rates were not in line with economic reality. While many in the market doubted that ECB easing or intervention was imminent, they expected more verbal jawboning from European policy makers, which could cap the euro. "The question is, are there enough reasons to sell the dollar even in the face of complaints from European and Japanese policy makers," said Fumihiko Kawano, forex manager at Nomura Securities. "The increase in the U.S. current account deficit is slowing down and it is well possible it has stopped ballooning after the dollar's fall in recent months. I think the dollar has hit a bottom."
DOLLAR RISE WON'T LAST?
The dollar has also been helped by speculation that the U.S. Federal Reserve may tighten policy sooner than expected if the sluggish U.S. labour market finally picks up. But others were less optimistic about the dollar versus the yen, pointing to the Japanese recovery. A string of Japanese economic data landed on Friday mostly in line with expectations, confirming the recovery is on track. Industrial output rose 3.4 percent in January from a month earlier, beating market forecasts for a rise of 2.8 percent. "Given the current state of the Japanese economy, capital outflow from Japan is unlikely," said Seiya Nakajima, chief economist at Itochu Corp. "That leads me to conclude the dollar's current rise is a technical adjustment." Still, Japanese authorities were likely to continue to intervene to stem the yen's rise and protect Japan's exports -- seen key to recovery. "We still are not going to have any real material to get the BOJ (Bank of Japan) to stop intervening in the market anytime soon," said Naomi Fink, senior currency analyst at BNP Paribas. Japan will unveil the amount of its intervention in February at 1000 GMT. "If the data shows Japan intervened heavily again in February after selling a record seven trillion yen (in January), yen-buyers will become discouraged," said Sahara of UFJ. Later in the day, U.S. gross domestic product data for the fourth quarter is slated to arrive at 1330 GMT and the University of Michigan consumer sentiment survey is due at 1445 GMT. In addition, the market is keeping an eye on what else Schroeder will say when he meets U.S. President George W. Bush on Friday.//