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Section:

Euro Falls as EU Wants Weaker Currency

By Kyle Peterson and Gertrude Chavez
Reuters
Monday, February 9, 2004
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=4317958

CHICAGO (Reuters) -- The euro fell against the dollar on
Monday after a published report said European Union
finance ministers will discuss "all possible ways" to curb
euro gains, raising the prospect of possible dollar buying.

Traders said the Dow Jones report, which quoted an
unnamed European Union official, triggered a mild selloff
in the euro. The ministers were due to meet on Monday in
Brussels.

The euro earlier scored a two-week high against the dollar
as markets determined that a weekend warning by the
Group of Seven economic powers against "excess volatility"
in exchange rates did not signal imminent, coordinated
dollar-buying intervention. Those gains now have completely
reversed.

"Basically we have these headlines from Dow Jones that
the EcoFin will discuss all possible ways to stop the rise
of the euro. ... Since then, the euro has ground lower and
lower," said Phillip Capone, vice president for foreign
exchange derivatives at Fortis Bank in New York.

So far, markets have largely ignored the communique,
issued after a G7 meeting in Florida, which said: "Excess
volatility and disorderly movements in exchange rates are
undesirable for economic growth."

"I don't think people are interpreting that as raising the risk
of coordinated central bank intervention to halt the dollar's
slide," said Alex Beuzelin, foreign exchange analyst at
Ruesch International in Washington, D.C.

"While the G7 statement could prompt a pause in the
dollar's downward trend, it's not going to halt it," he said.
"I think that's why you've seen the greenback weaken."

With the G7 risk out of the way, markets were expected
to resume dollar selling on the view that the U.S. current
account deficit is unsustainable and that Washington is
content to see the greenback fall to correct that
imbalance and boost economic growth ahead of
November's presidential elections.

Monday's U.S. economic calendar was light, so traders
will switch their focus to Federal Reserve Chairman Alan
Greenspan, who is due to give his semi-annual testimony
on monetary policy before the House Financial Services
Committee on Wednesday.

"If it's more hawkish than expected, it could have more
impact on the dollar than G7 ever could have," said Daniel
Katzive, currency strategist at UBS in Stamford,
Connecticut.

"We think he's going to reinforce the message sent by the
last FOMC statement that at some point policy will become
less accommodative, but that the Fed can be patient," he
said.

The U.S. central bank's policy-setting Federal Open Market
Committee at its last meeting on Jan. 28 changed the
wording of its stated view of the economy, saying it could
be "patient" in changing currently loose monetary policy,
and dropping a pledge to maintain it for "a considerable
period." In midday U.S. trade, the euro was down 0.39
percent at $1.2655. The dollar was up 0.29 percent at
105.75 yen. Sterling rose 0.51 percent to $1.8555.

The euro earlier raced as high as $1.2761. Sterling
offered the biggest drama, scoring an 11-year high of
$1.8628.

The Australian dollar was up 0.84 percent at US$0.7767.

Currency analysts said the euro had room to rise
further against the dollar, putting more pressure on
European companies to adjust to more difficult export
market conditions.

Many traders viewed the G7's reference to exchange
market volatility as a change of emphasis to counter
the impact of the G7's call in Dubai last September for
"more flexibility" in exchange rates. That statement
triggered a 10 percent drop in the dollar against the
euro, ringing alarm bells among euro zone officials.

Analysts said the shift in wording was likely a
compromise between the U.S., which backs market
flexibility that allows for growth-supporting dollar falls,
and Europe, which wants to prevent excessive market
movements from hurting its recovery.

The G7 also narrowed its Dubai call for currency flexibility
to countries "that lack such flexibility."

Traders assumed the shift was aimed at China and other
Asian countries that peg their currencies to the dollar,
although speculation simmered over whether Japan,
which has engaged in massive dollar-buying intervention
in the past year, was also under fire.

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