Bullish Euro Challenges Dollar as Zloty Rallies

November 12, 2003
By Neil Dennis and Ivar Simensen

The euro neared its highest levels in two weeks against the dollar on Wednesday as a lack of fresh news on the US economy, drifting stock markets and growing trade tensions took their toll on the US currency.

Meanwhile, data that showed French industrial production recouped some lost ground September, further helped fuel the resurgent euro.

"The failure of stocks and the dollar to react in an overtly positive way to last week's much improved US labour data remains something of a mystery," said analysts at ABN Amro.

Stock markets have certainly put on the brakes in the last few sessions, with many economists saying that the US employment data was already priced in to the markets.

With rising US losses in Iraq and a burgeoning trade dispute building between the US and its European and Asian trading partners over steel tariffs, investors appear to getting the jitters.

"Fears of tariffs on US exports after the WTO ruled that US tariffs on steel imports are illegal is also having a negative impact on the dollar," said Robert Lynch, currency analyst a t BNP Paribas.

The euro rose to $1.1645, breaking the key $1.1620 technical level that triggered further dollar selling, and well above the previous session's close of $1.1524.

The Bank of England's quarterly inflation report provided the focus for a rise in sterling as increased forecasts for growth and inflation initially fuelled rate-rise expectations.

Forecasting price growth would rise above its 2.5 per cent target in two years, the central bank said however that a slight dip was likely in the near term.

This led to aa surge in the pound to $1.6785, but it later slid back as investors took the view that rate-rise expectations were overplayed.

"We believe that rate hike expectations in the UK have now been over done, which is likely to leave sterling vulnerable to an adjustment of those expectations," said the strategy team at BNP Paribas.

By mid-session in New York, the pound had slipped back to $1.6750 against the dollar, but still up from the previous session's close of $1.666.

The zloty rallied as investors returned to the Polish currency following sharp drops in the last months. Concerns about slow progress in economic reforms, which led to critical commen ts from the European Union and a ratings downgrade by Standard & Poor's, pushed the zloty down about five per cent last month.

Investors now appeared to take the view that most of the bad news was already in the price and that economic reform would speed up ahead of Poland's entry to the EU and the euro. The zloty strengthened to 4.562 against the single currency, well off its early session low of 4.597, and rose to a four week high of 3.9207 against the dollar.

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