Euro Rally Builds Steam, Dollar Hit

January 23, 2003
By Burton Frierson

LONDON (Reuters) - The euro rallied to its highest level in three years against the dollar, knocking the greenback lower on other fronts as the single currency's rally gained strength, even in absence of fresh geopolitical impetus.

The euro has set a string of highs against the dollar and other currencies this year, as worries of a costly U.S.-led war on Iraq have given the single currency new safe-haven status.

But dealers said the euro's ability to break higher through tough resistance at $1.0750 on Thursday showed its advance was building its own momentum, even without new headlines on Iraq to undermine the dollar.

"It's definitely not news-driven and the interesting thing is also that we've not heard the word "Iraq" mentioned all morning," said Nick Parsons, currency strategist at Commerzbank.

"It's more of a euro move than a dollar move, but those who had tried to go long of dollars this morning just on the back of the stronger S&P (futures index) and the belief that the momentum was fading are getting stopped out now."

The euro peaked at $1.0768 in European trade -- its highest since October 1999.

It also extended recent gains against the yen to a three-and-a-half year high at 127.22 in Asia, before slipping back to stand flat on the day.

The dollar slumped to a new four-year low against the Swiss franc below 1.36 and dropped below the psychological 100 mark against a broad index of currencies for the first time in three years.

U.S. weekly jobless claims and lead indicators for December are due later in the session but are not seen as tremendous market movers.

DOLLAR SUPPORT SLIDES

Also knocking the dollar lower was news Russia's central bank would raise the level of its non-dollar reserves because of low returns on the U.S. currency, just the latest in a lengthening line of investors -- public or private -- to shun the greenback.

"There are hints of diversification, of greater favor toward the euro out of Asia. One is by Japanese deposit investors," said Aziz McMahon, currency strategist at ABN Amro.

"It does suggest that there has been a reluctance to invest in dollars given that interest rates are so low there."

Despite the euro's growing momentum, analysts note that fears of a U.S.-led war with Iraq -- which would burden the budget and threaten cross-border investment flows the U.S. needs to finance its large foreign trade bill -- is still an underlying theme.

"The euro liquidity appeal is a key attraction given the current uncertainty when investors are keen to lower U.S. exposure," said Shahab Jalinoos, currency strategist at UBS Warburg.

"The factors taking the dollar lower, such as war fears and deficit concerns, are well entrenched and the euro's uptrend is still intact."

CRUNCH TIME LOOMS

United Nations weapons inspectors are due to report on their search for Iraqi weapons of mass destruction on January 27 and markets are waiting to see how the U.N. Security Council, especially its five permanent members, will react.

Also eagerly awaited is U.S. Treasury Secretary-designate John Snow's confirmation hearing in Congress, scheduled for next Tuesday along with President Bush's State of the Union address.

So far Snow has not commented on the recent slide in the dollar which has shed a fifth of its value against the euro in the past year. Official silence on the issue has prompted doubts over the U.S. commitment to its longstanding strong dollar policy.

European Central Bank council member Ernst Welteke was quoted this week as saying the dollar was not too weak and needed no support.

Japanese Finance Minister Masajuro Shiokawa meanwhile said on Thursday a stronger yen was not good for domestic businesses but the government should not actively intervene in the foreign exchange market.

Some traders suggested Shiokawa may be trying to influence positioning in the currency market, so any intervention would have bigger effect, though others say the euro's rise against the yen may easing some concerns among Japanese officials.

"You could get intervention, certainly if the dollar goes a lot lower, but the rise in euro/yen is taking off some of the pressure," said McMahon at ABN Amro.

"Directly the euro/yen cross is not that important for trade for Europe and Japan.... Where Europe and Japan compete and where it is important is in third markets, particularly for cars and other industrial goods, and the U.S. market is important."mer | Copyright | Privacy | Corrections | Help & Info | Contact Us
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