20000204

Dlr shows spirit as market puts faith in Fed

TOKYO: The dollar remained broadly supported on Thursday after the Federal Reserve's well-flagged tightening left investors' faith in US assets untroubled.

Instead it was the euro's turn to suffer from rate suspense as the market waited to see if the European Central Bank would surprise by tightening at its policy meeting on Thursday.

Most doubt it will and, in any case, argue that a hike could prove counterproductive at this juncture, since the ECB does not boast the Fed's astounding level of credibility.

"The Fed can do no wrong," said a US bank dealer. "Doesn't matter what it does, people assume it's for the best and feel safe investing in US assets."

The Fed raised its target for the federal funds rate by 25 basis points to 5.75 percent, as expected, and increased its discount rate to 5.25 percent from 5.00 percent.

The central bank chose to emphasise that the risks in the economy were towards higher inflation, but the market has long been discounting further hikes, so US assets were hardly damaged.

The Dow lost 38 points but the firmed and Treasury prices rallied on news the US government intended to issue a lot less debt than anyone had expected.

All this left the dollar well-supported at 108.16 yen on Thursday afternoon having finished at 108.11 in New York.

Traders said the dollar ran into Japanese offers early on which dragged it as low as 107.78 yen, with talk of heavy selling on the Aussie/yen cross contributing.

But it found US bank bids there, while rumours a Japanese politician had mentioned raising the consumption tax helped hurt the yen at the margin.

Comments by senior Finance Ministry officials that they remained concerned about the effect of the strong yen on Japan's economy also gave the dollar some support.

With the Fed out the way until next month, attention turned to the European Central Bank and the risk of a tightening at its policy meeting on Thursday.

But the ECB's youth means it can only look on in envy at the Fed's credibility, and many dealers argue that with the market inclined to see only the negative in every situation, the euro was damned whatever the bank did on Thursday.

"If its doesn't hike, people will point to differentials as a reason to dump euros," said a European bank dealer.

"But if it does, people will say it's a threat to economic growth and sell the euro for that," he added, noting that this was exactly what happened when the ECB first raised rates back in November.

There was also a risk the ECB would look too reactive by moving so soon. "It would whiff of panic," he said.

Which was one reason why the euro was lying at $0.9734 in late trade against $0.9762 in the US

Nevertheless, traders did detect one potential positive for the euro in speculation that Vodafone Airtouch Plc's record-breaking bid for Mannesman AG would would be recommended to shareholders by the German telecoms group.

Analysts noted that in one stroke the 174 billion euro ($168.9 billion) deal would eclipse the entire deficit in foreign direct investment suffered by the euro zone last year.

They emphasised that the actual direct forex flow would not be anything as great as the nominal bid value, as it was an all-share offer.

But the sheer size of the deal suggested Vodafone would have a need to purchase euros at some stage, which was one reason given for a jump in the euro against the pound overnight.

A deal would also help counter investor concerns that the German authorities were hostile to foreign takeovers and to corporate restructuring in general. Currency bid prices. All data taken from Reuters with percent change calculated from the daily US close-Reuters