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Dollar ends higher vs mark as Buba repo cut eyed

LONDON: The dollar ended more than a pfennig higher here as the mark took a tumble on expectations a five-to-10 basis point cut in the 4.45 percent Bundesbank's securities repurchase rate will be announced early tomorrow.

While only three of 20 analysts polled by Reuters expect an official rate cut at the German central bank's council meeting on Thursday, the latest German money supply data suggests it will remain in easing mode in the weeks ahead, traders said.

"Liquidity conditions in Germany are very comfortable this week and should allow a five basis point repo cut," said Joe Prendergast, foreign exchange strategist at Merrill Lynch.

At 1510 GMT, the dollar was trading at 1.4824/29 marks, up from 1.4720/25 late Monday in Europe.

Against the yen, it was little changed at 96.50/55 compared with 96.65/75 late yesterday and recovered smartly from an overnight low at 96.0 yen, the lowest level since last Tuesday's surprise central bank intervention to buy dollars.

Dollar/mark caught a boost, meantime, from the news German M3 money supply unexpectedly contracted 0.4 percent in July against a fourth-quarter 1994 base, reversing a 0.4 percent rise in June. The data reinforced the soft economic numbers of late and kept confidence in further Bundesbank easing afloat.

The early burst of activity centred on the weaker mark today, with the German unit suffering against the yen in particular, traders said.

"The doves (on the Bundesbank council) have all the ammunition at the moment but it looks a bit too reactive for them to cut the discount Thursday," said Prendergast at Merrill.

The Federal Reserve's Open Market Committee convened in Washington, meantime, but few expect any change in key interest rates. The economy is growing briskly again without signs of inflationary pressures, economists said. "The market's expecting no change," said Citibank economist Michael Burke.

If the Fed leaves rates unchanged, it will finally remove residual concern about further easing in the U.S. for the time being and give the dollar a fillip, said Burke at Citibank.

Dollar/yen losses overnight were quickly clawed back, helped by expectations of a hefty sales of yen for dollars following Argentina's issue of a 100 billion yen (more than $1 billion) five-year Eurobond, traders and analysts said.

"It's most likely Argentina would convert the yen proceeds of the bond for dollar reserves, especially given the country's currency peg to the U.S. dollar," said Prendergast at Merrill.

Argentina is the latest in a rising spate of yen borrowing.

Some traders and chartists, however, are growing a bit wary of the dollar's stagnation this week following the central bank inspired rally last week. They say there's a risk in the week ahead of disappointed long dollar positions being cut.

"It's all getting a bit top heavy for my liking and unless the Bundesbank pulls off a stunt on Thursday we may see some nerves creep in," said a trader at a Dutch bank here.

"With 80 to 90 percent of the market already bullish and the dollar going sideways, you get the feeling it's vulnerable to a shakeout before good medium-term support reappears," said Prendergast at Merrill.-Reuter