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Dollar consolidates gains, awaits FOMC

LONDON: The dollar trod water on Monday, consolidating the big, across-the-board gains it made last week on strong U.S. growth data, as it awaited a closely watched Federal Reserve policy meeting this week.

The dollar hovered within one cent of a record high of $0.9733 to the euro EUR it set on Friday and a half yen off a three-month peak against the yen JPY of 107.26, but traders said the modest pullback did little to dampen the greenback's upbeat outlook.

"The dollar is very much at the pole position," said Neil MacKinnon, senior currency strategist at Merrill Lynch in London. "The exceptionally strong GDP numbers we saw on Friday were just a reminder of how attractive the economic growth differential in favour of the dollar is."

Even though the robust U.S. gross domestic product and employment cost index for the fourth quarter of 1999 on Friday fuelled expectations of an aggressive Fed tightening, triggering a 2.62-percent selloff in the Dow Jones industrial average .DJI and a plunge in Treasury bond prices, the link between asset prices and the dollar was weakening, traders said.

"Stock market weakness, certainly for the near term, doesn't guarantee dollar weakness," MacKinnon said. "If you look at what's happening elsewhere, the euro is very much on the ropes and the yen has been weakening as well, so the U.S. dollar stands out as the best of the bunch."

The Fed was widely expected to raise its Fed funds target by a quarter percentage point after a two-day policy meeting ending Wednesday. While a rate hike would be bad news for asset markets, interest rate differentials themselves would increase the dollar's edge over other major currencies, traders said.

NO OFFICIAL HELP FOR EURO

The euro, which is now more than 16 percent below where it began trading against the dollar in January 1999, remained soft as European officials were perceived to be sanguine about the single currency's decline.

European Monetary Affairs Commissioner Pedro Solbes said earlier he did not see any need for euro zone finance ministers to change their public policy line on the euro.

European Central Bank President Wim Duisenberg said on Sunday he was "pretty satisfied" with the euro's performance, although he also said the currency had potential to rise.

"The euro is a difficult call - there is no obvious reason for it to be in crisis. That is the difficulty investors have," said David Coleman, chief economist at CIBC World Markets in London. "With no signs of recovery over the last couple of weeks, it may be that we need some kind of official intervention to give it a bit of a shot in the arm."

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

The euro was relatively resilient against the yen, which was perceived to be somewhat unusual because whenever it weakened against the dollar in the past year, it had almost always weakened against the Japanese currency as well.

That led to talk in the market that hedge funds were unwinding short dollar positions, particularly against so-called commodity currencies like the Australian and New Zealand dollars, traders 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," said a Japanese bank dealer in Tokyo. "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."-Reuters