20000127

Euro drops but then finds footing in US

NEW YORK: The euro fell below one to one parity with the dollar in early trading on Tuesday, slipping through the historic level for the second time in seven weeks as Wall Street recovered.

The one-year old currency fell as low as $0.9988, according to Reuters data, coming within a hair of its lifetime low set at $0.9986 on Dec 6.

But following the pattern set on Monday, the euro then staged a smart recovery and wiped out half of the day's losses even though it still traded about one quarter of a percent below Monday's closing level at noon.

Even as many analysts forecast more losses for the euro, the morning's seesaw action came as no surprise.

"The correlation between the stock market and the euro is still intact," explained Rick Barnett, chief currency dealer at Royal Bank of Canada in Toronto.

Early bets the Dow Jones industrial average would wipe away Monday's 2.16 percent fall hurt the euro in European and early US trading. But when Wall Street's anticipated rally failed to materialise and the Dow wilted another quarter of a percent, the euro found its footing.

"The euro is definitely offered and eventually it will drift lower still but there is a sense that someone is holding it up near the lower levels," said ING Barings senior vice president John McCarthy in New York.

Trading rooms were abuzz with rumours some central banks may have lent a hand in preventing further euro losses but there was little hard evidence of what stopped the euro from setting fresh life lows on Tuesday.

"There was talk of decent names buying euros at the lows, but we cannot confirm anything," Barnett said.

A heavy snowstorm sweeping up the eastern coast of the United States was blamed for some of the erratic movements as many New York trading floors were thinly staffed at the start due to late arrivals.

In Washington, Federal Reserve Chairman Alan Greenspan's testimony was cancelled, robbing financial markets of the day's main focus.

Dealers had expected Greenspan's absence to generate a stock market relief rally which could have spelled more problems for the euro.

Even though the Dow tripped lower again on Tuesday analysts remained generally confident the Federal Reserve will succeed in keeping inflation under control, allowing the unprecedented US expansion to continue. Therefore Wall Street's potentially negative impact on the dollar is seen to be slim.

Meanwhile the euro also failed to draw much support from a batch of euro-zone data showing that euro-zone economic recovery was on broadly on track.

Consumer prices in the German state of Hesse rose an annual 2.0 percent in January from 1.5 percent in December. In the state of North Rhine Westphalia CPI rose 1.9 percent from 1.4 percent in December, while Saxony's consumer prices rose 1.4 percent from 0.6 percent previously.

"There has been dramatic improvement in the euro zone data over the last six months. But the euro seems impervious to euro zone fundamentals. Until the Dow loses significantly or the European Central Bank officials' comments change in tone, I don't think the euro is going to go anywhere," said Matthew Clements, economist at Prebon Marshall in London.

Meanwhile, the yen was mired in familiar ranges against the euro and the dollar after the Group of Seven rich industrialised nations at the weekend meeting said they shared Japan's concern over the yen's strength.

Japanese Finance Minister Kiichi Miyazawa said in Tokyo that Japan would intervene to address disruptive movements in the currency markets, although no such movements had been seen so far on Tuesday.

The euro pushed higher against the yen, trading comfortably above Monday's three-week low at 104.80.

Dollar/yen extended its gains to stand about one quarter of a percent higher around 105.89 yen, more than one and a quarter yen above Monday's lows of 104.62.-Reuters