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Dutch finance minister''s comments give euro another boost

Section: Daily Dispatches

By Steven Vames
Dow Jones Newswires
Monday, December 27, 2004

NEW YORK -- With conditions in currency markets
already thin, whatever trading takes places during the
final week of 2004 is likely to be choppy and volatile
for the dollar.

The euro pushed to yet another all-time peak versus
the dollar Thursday, reaching briefly above the key
$1.35 level to go as high as $1.3506. The U.S.
currency also fell broadly versus other currencies to
cap off a mostly losing week in which the yen and
Swiss franc traded toward the tops of their recent
ranges. Late afternoon Thursday, the euro was at
$1.3495, up from $1.3389 late Wednesday. The
dollar was at Y103.72, down from Y104.09 and at
CHF1.1440, down from CHF1.1525. The pound
was at $1.9203, up from $1.9139.

Though there are still five days of trading remaining
in 2004, the drop to new lows seemed to reinforce
the notion that any significant year-end dollar
rebound isn't going to materialize.

Liquidity tends to dry up at the end of every year
because most institutions have closed their books
on currency trading by mid-December. The resulting
low volumes provide short-term speculators an
opportunity to jockey for positions in an almost
empty field, which often leads to exaggerated
intraday movements.

But underlying the customary lull this year is an
active trend lower for the dollar, and the lack of
market participation is serving to boost the price
influence of those who want to continue selling
the dollar.

"The market is still focused on structural
imbalances for the U.S. economy and the
potential for further dollar declines," said Todd
Elmer, foreign exchange strategist at Barclays
Capital in New York. "We still have people
wanting to put on dollar shorts and those trades
are being exaggerated by low liquidity," he added.

This week is likely to hold more of the same:
choppy, unpredictable trading with the risk that
the dollar will continue falling, said Elmer.

In recent weeks, many traders had suggested that
the dollar was heading toward a year-end bounce,
as firms closed out short-dollar positions to book

However, even a partial dollar recovery proved
elusive. Data last week from the Commodity
Futures Trading Commission showed that
speculators had largely closed out their short-dollar
positions in year-end profit taking without creating
a significant rebound for the U.S. currency.

But by taking profits, traders were also setting the
stage for a new assault on the dollar next year,
since they will have to sell dollars again to build
back their bearish positions, according to analysts.

Further dollar declines next week, if markets appear
disorderly, could also raise the volume of rhetoric
from European and Japanese policymakers, who
have recently expressed displeasure with their
respective currencies' strength.

Likewise, there are some analysts who have raised
the possibility that Jan. 1 could see a move by the
People's Bank of China to change its currency policy.
The most likely scenarios would be to widen the
trading band for the yuan, which is effectively
pegged to the dollar at CNY8.2770, or an outright
revaluation the currency.

Though most analysts don't agree that China will
move that soon, speculation along those lines could
pressure the dollar versus other Asian currencies
as the week wears on. The logic, according to
traders, is that more flexibility on China's part will
lead to wider flexibility across Asia, and could lead
to a broadly weaker dollar versus many Asian

Some of the most active trading last week was in the
pound versus the euro and dollar. The U.K. economy
projected a string of bad news on the pound last
week, including a report of slipping home prices, a
perceived decline in the likelihood of Bank of
England interest rate hikes, and a growing current
account deficit.

Traders have seen the news -- and the sharp moves
lower in the pound -- as an ominous sign.

"The slowdown in the fundamental outlook in the U.K.,
especially on the domestic side of the economy,
together with the anticipated increase in speculation
that the BoE will start to ease policy again will likely
turn sterling from an outperforming position seen in
2004 to an underperformer in 2005," said Ian
Stannard, senior foreign exchange analyst at BNP
Paribas in London.

There will be little new U.K. economic data this week,
but the pressure on the pound could continue,
Stannard added.

In the U.S., however, data will likely play only a
marginal role in trading, with few reports of
consequence. On Tuesday, the Conference Board's
consumer confidence index is expected to have risen
to 94.6 in December from 90.5 in November.

On Wednesday, existing home sales for November
are expected to have risen to 6.8 million from 6.75
million in October. On Thursday, the Chicago
Purchasing Management Index is expected to have
slipped to 63 in December from 65.2 in November.


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