Forex - Dollar gains vs euro after policymakers voice concern over euro strength

Tue, Oct 2 2007, 06:44 GMT
http://www.afxnews.com

HONG KONG (Thomson Financial) - The US dollar recovered against the euro in Asia midsession after European policy makers aired concerns about the pace of the single currency's appreciation.

European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker both expressed some apprehension about the dollar's weakness, which would make European products exported to the US more expensive.

"The European officials don't want the US dollar to fall too quickly against the euro," said Mark Wan, vice president for treasury at DBS Bank in Hong Kong. "That's the reason behind the weakening of the euro. They want to slow down the appreciation of the euro."

At 1:00 pm, the euro was trading at 1.4217 dollars from 1.4236 this morning in Sydney. The euro hit all-time high record of 1.4283 dollars in Asian trade on Monday.

The dollar was quoted at 115.42 yen, down from 115.74 this morning and 115.80 in late New York trading overnight.

A decline in European exports to the US may slow growth in the euro zone, and this could prompt European policymakers to hold off hiking benchmark interest rates in the euro zone, reducing the lure of euro-denominated assets.

On the other hand, signs that the subprime mortgage crisis is subsiding and that fallout in the US economy has been contained may stay the Fed's hand from further rate cuts after this month, and that would increase investor appetite for dollar-denominated securities.

"The market is closely watching economic data releases in the US, particularly the payroll figures for September," Wan said.

If the September payroll report showed that jobless claims are improving, then "that could change the whole interest rate picture in the US," Wan said.

Jobless claims in the US unexpectedly fell in the week ending Sept 12, the second week of a decline in unemployment claims.

Wan expects the Fed to follow its bold half-a-percent rate cut on September 18 by another quarter-point cut by end of the month. That may be the last rate reduction for this year should the economy show signs of a recovery, he said.

Still, Wan is keeping his forecast that the euro may hit an all-time high of 1.44 dollars by yearend, while the yen will likely stick to the 114-117 range against the dollar.

"We have to wait and see if Japan can sustain its record-high exports to Europe and Asia in September, a sign that it has reduced its dependence on the US market," he said.

If this happens, then the yen may appreciate to the 110 per dollar level or even higher than that, he added.

In August, Japan's exports grew at an annual 14.5 percent, as sales to Europe and Asia soared while sales to the US inched up. Japan's trade surplus nearly quadrupled to 743.2 billion yen during the period.

John Noonan, analyst at Thomson IFR, said the recovery from extreme market turbulence seen in August due to the housing loan market crisis is now complete, with the Dow Jones Industrial Average at record highs and yen-funded carry trades nearly back at the levels they were in before the market turmoil began.

Carry trades refer to the practice of borrowing in low-yielding currency such as the yen to invest in high-yielding currencies elsewhere.

Noonan said the growing view that the worst might be over for the US economy could bring on a broad US dollar correction and send the euro lower, which would be a relief for euro zone officials worried that the euro was becoming too strong.