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Dollar eases but tone firm as fund rumours fly

TOKYO: The dollar eased against other major currencies by late afternoon on Monday but its firm tone remained intact, as the market tried to assess rumours that hedge funds were actively unwinding short dollar positions.

The dollar posted strong gains on Friday after the release of surprisingly robust US economy data fuelled expectations of an aggressive credit tightening by the Federal Reserve Board.

But dealers said speculation on the Fed's moves alone could not explain Friday's market gyrations, which also saw the Dow Jones industrial average fall 2.6 percent and the price of the benchmark 30-year Treasury bond rise one point.

"Rumours that some funds were in trouble fuelled so-called 'flight-to-quality' moves, resulting in selling of stocks and buying of bonds," said Hirotsune Miyama, chief manager at Toyo Trust Bank.

The euro was quoted at $0.9798/03 up slightly from $0.9745 in New York late on Friday.

The euro had dropped to a new lifetime low of $0.9735 in New York, down more than 16 percent since its launch a year ago, after US data showed the economy grew at a 5.8 percent annual rate in the last three months of 1999.

The dollar also climbed against the Japanese currency to a three-and-half-month high of 107.33 yen on Friday, and gained strongly against the Australian, New Zealand and Canadian dollars.

The dollar was quoted at 106.93/01 yen late on Monday, versus 107.08 in New York late on Friday.

Dealers attributed the dollar's gains last Friday in part to a growing belief the Fed will tighten credit aggressively to curb inflationary pressures.

One dealer noted this would increase the differential between interest rates in the United States and in other Group of Seven industrialised nations.

In a Reuters poll of 30 primary dealers of US government securities conducted last Friday, all firms said they expected the Fed to raise the key federal funds rate by a quarter percentage point to 5.75 percent when its policy-setting Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday.

More than two-thirds of the firms surveyed expected the fed funds rate to be raised by another 25 basis points to six percent at the March 21 FOMC meeting.

But dealers on Monday said they were more focused on rumours that some hedge funds were actively unwinding long positions in commodity-oriented currencies to generate cash to meet margin calls.

The dollar's rise to its highest level since mid-October against the yen on Friday may also have been triggered by funds' liquidation of long yen positions, dealers said.

"In the past, a drop in the euro against the dollar normally led the euro to fall against the yen, subsequently pulling down the dollar against the yen. But this was not the case on Friday," said a Japanese city bank dealer.

"So the hedge fund rumours may not be totally groundless. There must have been factors other than economic fundamentals producing those volatile market moves on Friday," he added.

Opinions in the market were divided on the possibility of the European Central Bank (ECB) raising its key interest rate at Thursday's policy-setting meeting.

"If the ECB raises the interest rate, that would come as a bit of a surprise," said Toyo Trust's Miyama. "But higher euro-zone interest rates at a time when the United States is also raising its interest rates probably won't halt the euro's drop."

Bundesbank council member Klaus-Dieter Kuehbacher was quoted by the German paper Welt am Sonntag in an interview published on Sunday as saying that he expected the ECB's governing council to raise interest rates on Thursday.

But a dealer at a European bank said: "As Kuehbacher is not an ECB council member, I don't think people are convinced that the ECB would actually pull the trigger this week."

One bit of good news for the single European currency was a weekend magazine report quoting German Finance Minister Hans Eichel as saying the euro is bound to regain strength because China planned to convert most of its dollar reserves into euros.

Der Spiegel magazine quoted Eichel as saying his outlook for the euro was based on assurances made to him during talks with Chinese Prime Minister Zhu Rongji, Finance Minister Xiang Huaicheng and central bank governor Dai Xianglong.-Reuters