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Dollar ends steady after

disappointing Treasury auction

NEW YORK: The dollar retreated Monday from an overnight rally and ended little changed on disappointment about the results of a U.S. Treasury note auction.

Currency traders were watching the auction closely to see if Tokyo's new package to encourage overseas investment, which caused a sharp rally in the dollar last week, would increase the Japanese appetite for U.S. assets and bolster the dollar further.

Expectations of robust overseas demand in the first leg of the Treasury's quarterly offering had pushed the dollar higher initially. It reached 1.4125 marks, a three-week high, and 91.87 yen, the highest level in five-months.

"The market got a little bit too bullish before the auction and we ran the dollar up strongly," said Earl Johnson foreign exchange economist at Bank of Montreal in Chicago.

But traders said demand from Japanese institutions was lukewarm, causing the dollar to drop back.

"The auction wasn't terrible, it was just mediocre," said Richard Vullo, vice president at Bayerische Hypotheken und Wechsel Bank.

"There is a lot of disappointment because this dream that the Japanese were going to come running in and buy up all of bonds didn't happen," he said.

But dealers said the market will likely remain on hold as traders wait to see if Japanese buying will emerge in the next two parts of the refunding -- the 10-year note auction Wednesday and the 30-year bond sale on Thursday.

"I don't think we have enough information yet to support a move one way or the other right now," said Joe Francomano, foreign exchange trader at Dai-Ichi Kangyo Bank in New York. "The dollar did come off today but I think people are going to want to wait and see what the longer-term picture looks like."

By late New York trading, the dollar was at 91.45 yen, little changed from Monday's 91.39 yen. It was at 1.4083 German marks, little moved from 1.4075 late Monday.

While the refunding is seen as key for the dollar against the yen, traders are waiting to see if the Bundesbank -- Germany's central bank -- will cut German interest rates on Wednesday.

Dealers said it is widely believed that the Bundesbank will sanction a small cut in its main money market interest rate, which has been held at 4.50 percent for nine weeks.

Many analysts said the German central bank could follow that up with a cut in its official 4 percent discount rate at its council meeting on Thursday.

"It looks like dollar/mark could be catching up to the rise we have seen in dollar/yen," said Amy Smith, currency analyst at consulting firm I.D.E.A. "The tone is quite positive and the Bundesbank speculation is fuelling that."

Lower rates in Germany would benefit the dollar because they would make German assets less attractive to foreign investors.

Against other currencies, the dollar was slightly higer at 1.1670 Swiss francs vs. 1.1660 Swiss francs Monday.

The British pound traded at $1.6025, little moved from $1.6020. The dollar was at C$1.3575, up from C$1.3562.-Reuter