25 July 2005, 16:36 The dollar shed some earlier gains but was still up on the lows hit last week
The dollar shed some earlier gains but was still up on the lows hit last week as the impact of last week's surprise revaluation of the Chinese yuan faded and investors refocused on expected strong US economic news this week
"The dollar has started this week firmer again as the market has absorbed last week's China news and realised for now anyway that the move is comparatively small," said Mansoor Mohi-uddin, currency strategist at UBS
"The fundamental focus is retuning to the cyclical picture for the US," he added
Last Thursday, China announced that it was abandoning the yuan peg with the dollar. From now on the yuan will be linked to a basket of unnamed currencies and only allowed to trade in a daily band of plus or minus 0.3 pct
The move resulted in a 2.1 pct appreciation in the value of the yuan, which had been pegged at about 8.28 yuan to the dollar for the past decade, but is now traded at 8.11 yuan to the dollar
The step was widely seen as a political move by China aimed at appeasing trading partners like the US and was widely praised by governments and economists as the "first step" toward greater flexibility in China's forex regime. As expected, the revaluation of the yuan raised the value of Asian currencies, including the yen, against the dollar
However, a number of analysts doubt that China will be revaluing again any time soon. Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi, said the dollar has managed to regain some further lost ground against the yen "as market participants scale down their expectations on the extent of the revaluation". This week's economic data, particularly Friday's second-quarter US GDP estimate, are expected to be positive news for the dollar
Up to about two weeks ago, the dollar had moved to 14-month highs against the single currency as investors worried about the political future of the EU following the rejection of the EU constitution by France and the Netherlands and placed a greater emphasis on developments related to yield differentials
While the ECB has often been urged to cut rates from 2.0 pct to help boost anaemic economic growth, the Fed is poised to continue raising the cost of borrowing from the current 3.25 pct in a measured manner
Though economic data out of the 12-nation single currency zone is expected to be relatively strong, especially tomorrow's closely-watched Ifo survey of business confidence in Germany, analysts said the euro is unlikely to advance too much as the interest rate differential between the US and the euro zone will remain the same
"The euro supportive effect should remain limited as a stronger European economic performance will not challenge the interest rate differential significantly enough to squeeze carry trades," said Hans Redeker, global head of FX strategy at BNP Paribas
Elsewhere, the pound was steady with markets widely predicting a quarter point interest rate reduction from the Bank of England next week following weak economic growth data
Today's monthly house price survey from Hometrack, the property website, merely cemented those expectations
Hometrack found that house prices fell for the thirteenth month running in July as confidence continues to be dented by further price declines
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