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Dlr suffers self-doubt as growth gap narrows

TOKYO: Both the yen and euro gained altitude on Friday as fresh evidence of economic momentum showed Japan and Europe closing the growth gap with the United States.

Dealers were particularly intrigued by the dollar's failure to make capital out of a blistering performance from Wall Street on Thursday. The Nasdaq leapt ahead yet the dollar was left in the dust, breaking the recent strong correlation between the two.

"Normally a three percent jump in the Nasdaq would have the dollar charging ahead, but instead it's given ground to the euro and that's weird," said a US bank dealer.

The euro was holding at $0.9665 having firmed to $0.9662 in New York on Thursday from a $0.9520 low earlier in the week.

It was also standing steady at 102.76 yen thanks in part to the promise of Bank of Japan aid after intervention lifted it from lifetime lows around 101.95 this week.

The dollar slipped to 106.35 yen in the face of selling by US and Japanese banks, from 106.60 late in New York, so testing levels where the BOJ first stepped into the market on Wednesday.

"Maybe there's just a lag in the dollar/stock relationship, or it could be that all this bullish talk we're hearing about Japan and Europe is making investors think again," said the trader.

A run of strong data in Japan certainly seemed to have galvanised the authorities, with Finance Minister Kiichi Miyazawa uncharacteristically unequivocal.

"Overall, the economy is clearly starting to get out of recession, and we shouldn't worry," he said.

"For someone as circumspect as him, those are clearly fighting words," said a dealer at a European bank.

And Economic Planning Agency chief Taichi Sakaiya joined the chorus, declaring that Japan's economy was definitely heading for recovery.

Even the ever-cautious BOJ noted an improvement in capital spending, corporate sentiment and profits. The economic data added to the spring-like atmosphere, as trade figures showed imports rising almost 12 percent year-on-year in January, while exports still managed a small gain even in the face of a stronger yen.

Analysts did still expect fourth quarter GDP data due next on Monday to show a decline of around 1.0 percent, so technically at least tipping Japan into recession.

But they argued that the surprising strength in many leading indicators recently, most notably in capital spending, had made the rather dated GDP data vitually redundant.

The buzz out of Europe was also of brightening prospects.

Overnight the European Central Bank issued a bullish report on the European economy, predicting GDP growth of above 3.0 percent this year and next.

And the data seemed to back that up, with fourth quarter GDP in the eurozone coming in at an annual 3.1 percent.

The ECB took a hawkish line on inflation, warning that the risks to price stability were on the upside. That was enough to convince some analysts that the ECB would hike interest rates at its meeting next week, instead of waiting until the end of the month as most had previously expected.

Dealers said euro sentiment was also aided by news Deutsche Telekom had withdrawn a bid for two US telecoms companies. There had been reports Deutsche would bid over $100 billion for the two, implying a considerable forex flow from the euro to the dollar.

A flood of foreign direct investment out of Europe some 147 billion euros was one reason the single currency fared so badly in 1999. Currency bid prices. All data taken from Reuters with percent change calculated from the daily US close. -Reuters