26 July 2004, 14:41  Dollar takes step back ahead of data litmus test

The dollar slipped from last week's three-week highs against the euro on Monday as the market waited data to see if fresh data supported Federal Reserve chief Alan Greenspan's recent optimism on the U.S. economy. Consumer confidence on Tuesday, durable goods on Wednesday and gross domestic product on Friday will be key tests for the dollar after Greenspan said last week recent weaknesses in the economy were transitory. The Fed chairman indicated interest rates still needed to go higher, albeit at a gradual pace. After the dollar rose around three percent against the euro, Swiss franc and sterling following Greenspan's testimony in Congress, dealers were still trying to assess how much of the move was short covering after a steep dollar selloff in previous weeks.
"We had some big moves last week and people are reassessing the situation -- Is this something that's going to continue or was last week a one-off and (do) we return to a structural depreciation from here?" said Marvin Barth, senior currency economist at Citibank in London. "People are trying to assess what the data are going to mean so you're not seeing a lot of position taking today ahead of it." By 1000 GMT, the dollar traded down half a percent on the day against the euro at $1.2158 , after rising to this month's high of $1.2084 on Friday. It crawled back from a half percent loss against the yen to 109.85 yen , just a quarter percent lower on the day, but was 0.6 percent weaker versus the Swiss franc at 1.2603 . June U.S. existing home sales data is at 1400 GMT, with economists forecasting a median 6.6 million annualised units total versus 6.8 million in May. Federal Reserve Bank of Kansas City President Thomas Hoenig speaks at 1730 GMT.
REAL RALLY?
Analysts said the next two weeks would be key for the dollar as the July employment report is due at the end of next week. "If we see a divergence between the data and Greenspan's optimism -- i.e. the data is worse than expected -- then you might see a more aggressive dollar selloff as we did in the week or two leading up to Greenspan's speech last week," said Chris Gothard, currency analyst at Brown Brothers Harriman in London. Markets may also be hesitant to take on fresh long positions in the dollar due to the possibility of terror attacks during the U.S. Democrats' national convention, which begins in Boston on Monday, and this could limit the dollar's upside this week. The Federal Bureau of Investigation said late last week that it was investigating "unconfirmed information" of a possible attack during the four-day event. Meanwhile, the blue-chip Dow Jones average <.DJI> closed below the psychologically important 10,000 level on Friday for the first time in two months, while the tech-heavy Nasdaq composite index <.IXIC> hit a fresh low for the year. Dealers were watching the current earnings season on Wall Street to see whether this would support or undermine the dollar. U.S. stock futures were indicating a mildly positive start later on Monday. "If we continue to see earnings coming in in-line to perhaps slightly disappointing and equities under pressure, that again would leave the dollar looking softer," said Adam Cole, senior currency strategist at Royal Bank of Canada Capital Markets.///

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