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Dollar buoyed as market re-rates America

TOKYO: The dollar was well-supported in Asian trading on Tuesday as a global re-rating of media and Internet stocks promised to benefit the U.S. above all.Dealers said the market was still trying to absorb all the ramifications of America Online Inc's record-breaking bid for Time Warner Inc

"Obviously there are far-reaching implications for many markets but, sticking to forex, the main effect is to support the high valuations of U.S. stocks and so support the dollar at the expense of the euro," said a U.S. bank dealer.

"After all, the world's biggest concentration of Internet and media companies is in the U.S.," he said.

This was a dampener for the euro since European funds are massive net investors in U.S. equities, and anything that keeps the U.S. attractive and delays the day when they withdraw their money is a plus for the dollar.

Which is why the euro was loitering at $1.0265 late in Tokyo, having slipped to $1.0253 in New York from $1.0289 on Friday and a high last week of $1.0414.

The blow was softened by bids from Japanese investors for euros against the yen, which helped it press ahead to 108.17 yen from 107.80 in New York.

Traders say Japanese exporters and institutions had built up a lot of forward cover for the euro late last year for fear of a renewed slide in the single currency and were now finding it profitable to unwind some of that.

There was far less impact of merger mania on dollar/yen, since Japanese investors have far less money tied up in U.S. equities. What's more, gains in U.S. high-tech shares tend to be mirrored by their Japanese counterparts, which was one reason the Nikkei was up over 650 points or 3.6 percent.

The dollar was hovering at 105.30 yen in late trade, having inched up from 105.10 in New York. It had blipped as high as 105.45 yen on Tuesday morning when rumours circulated that rating agency Standard and Poor's was about to make a negative announcement on Japan's credit standing.

Traders said this looked to be a couple of interbank players trying to spook the market ahead of a lunchtime speech in Tokyo by S&P President Leo O'Neill.

In the event, O'Neill reaffirmed Japan's top notch Aaa rating, saying the government's debt burden was manageable given the country's massive wealth.

But he added the caveat that economic growth had to pick up as expected for the Aaa rating to be maintained.

For the near term, traders expected dollar sentiment to swing in time with Wall Street's fortunes, and those looked bright for the moment with a global re-rating of media and high tech stocks under way.

Dealers noted that the market had easily coped with comments by Federal Reserve Board member Alfred Broaddus, who suggested in a speech to business leaders that the central bank was likely to hike rates again.

He said the risks were rising that exceptionally strong domestic demand would cause the economy to overheat and argued the Fed should always act preemptively and not wait until inflation accelerated before raising rates.

The cautionary comments had a muted effect, as Broaddus is widely known as a hawk and in any case the market has already fully priced in a 25 basis point tightening at the Fed's next meeting in early February.

Thus the S&P 500 futures contract was off only a modest 1.50 points and 1,473.50 on Tuesday afternoon, and that solely due to profit-taking, dealers said.

The market may pay more attention when Fed Chairman Alan Greenspan gives a speech on Thursday. The title is "Technology and the Economy", but investors will be hyper-sensitive to even the slightest hint as to how aggressive the Fed's tightening is likely to be this year.-Reuters