20000128Euro turns back on more losses against dollar

NEW YORK: The euro closed flat against the dollar on Wednesday, having staged a smart bounce following its second encounter with levels below $1.00 in two days.

Dealers again failed to blast Europe's single currency out of a well-established trading range, and the euro ended 0.06 percent higher against dollar than Tuesday's closing level.

"We went home with the euro trading near parity on Tuesday, it is near parity now. We have traded in a (tight) range and it is one of the most boring days we have had in five years," said Ben Strauss, vice president at Bank Julius Baer in New York.

In mid-afternoon, the euro sagged to 99.95 cents, according to Reuters data, finally drifting beneath the psychologically key one-to-one level it had flirted with several times during the day. On Tuesday, the euro fell below one dollar for the second time in seven weeks.

But following this week's pattern, the euro spent little time below the $1.00 level, as heavy interest from large U.S. and German banks orchestrated a smart bounce.

The euro's weakness was reflected in its 0.25 percent fall against the yen and the Swiss franc's 0.07 percent fall against the dollar toward 10 year lows. The British pound sagged 0.36 percent against the dollar.

Dealers blamed the euro's weakness largely on the dollar's enormous potential at a time U.S. economy looks set to steam ahead into a ninth year of expansion.

Fears that Europe's recovery may be choke off if rising inflation rates forced the European Central Bank to adopt a more aggressive tightening mode also hurt the euro.

On the other hand, fears that European central banks would intervene in the open market to stem further euro losses kept the currency relatively well protected.

"The market seems eager to take the euro lower but there also seems to be a psychological barrier (around $1.00) and traders are being very cautious right now," said Brian Arabia, vice president at ABN-Amro Bank in Chicago.

Looking ahead to a time when the euro should break out of this week's relatively narrow one-cent range, analysts said the economic growth potential will determine new levels.

"It is still the relative growth story in the U.S. and Europe and the way that is being reflected in relative yields and that is affecting the capital flow which is determining the foreign exchange rate," said Paul Lambert, senior currency strategist at Citibank in London.

Earlier in the day The European Commission said annual inflation excluding energy price increases rose 0.9 percent in December, unchanged from November's rate. However German states released stronger price data earlier in the week, sparking some worries about the overall trend.

Dealers had braced for another break of dollar parity as many speculated some players would try and hit the 99.80-cent level before knock-out options with that trigger expired.

"Everyone is eager to see what is below $1.00 and who might be there trying to buy it back up," said Ralph DelZenero, vice president at Banc One Capital Markets in Chicago. "We seem to be trading a full range on the euro every day, and that means we will probably go lower again."

But traders appeared more jumpy than usual amid talk that European central banks might be ready to stem further euro losses even though they seemed sceptical that any real intervention activity is being planned.

European Central Bank Chief Economist Otmar Issing, speaking in Berlin, said the euro exchange rate itself cannot be a target for ECB policy, but warned it will not be ignored either. "If exchange rate developments pose a threat to price stability in the euro area, this threat will be taken into account together with the information on price developments revealed by all other indicators."

Earlier on Wednesday, National Bank of Belgium Governor Guy Quaden told Reuters "I don't exclude or rule out the possibility of intervention one day."

The yen was broadly steady against the dollar JPY despite a 1.14 percent rally in the Nikkei stock price average on Wednesday.

The Japanese government earlier reported the nation's retail sales fell 1.2 percent year-on-year in December.

Comments from Federal Reserve chairman Alan Greenspan at his reconfirmation hearings failed to excite the market. -Reuters