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Dollar ends lower after baulking near recent highs

LONDON: The dollar continued to slip in afternoon Europe, undermined by disappointment that it failed to hold at the top of its consolidation range versus the mark after the German Bundesbank cut its securities repurchase rate.

The six basis point cut in the repo rate to 4.39 percent propelled the dollar to a high of 1.4923 marks, within a whisker of the six-month high of 1.4930 it reached on August 16. But selling pressure close to the peak put the brakes on the dollar.

"There was disappointment when the dollar didn't hold above 1.49 in Europe after the repo cut -- so the U.S. started testing the downside", said Graham Cocks at Bank of Boston.

At 1530 GMT the dollar was trading at 1.4795/02 marks compared to 1.4850/55 in late Europe on Tuesday. Against the yen it was at 96.24/31 against 96.58/68.

The repo rate cut left the market guessing when the axe would fall on Germany's official interest rates. But the Bundesbank is not generally expected to lower the discount and Lombard rates from the current respective levels of four and six percent at tomorrow's meeting.

Nevertheless, the repo rate cut helped to prevent sharper dollar losses as dealers adopted a cautious attitude ahead of the meeting.

"The dollar was underpinned because even if expectations of a discount rate cut tomorrow are low, the possibility is there," said Cocks, who is a vice-president at Bank of Boston.

But most analysts expect the German central bank to hold off until at least September when first-quarter GDP data are out. "All the German data this week has been pointing towards a rate cut, but they may want to see GDP and possibly inflation data in September before finally deciding," said Howard Archer, research manager at National Westminster Bank in London said.

Dollar/yen dropped on dollar/mark's coat tails after shying away from resistance after a brief foray above 97 yen.

Analysts said dollar/mark has its guns trained on 1.50 marks, though they are split over whether Germany must cut official rates to give the U.S. currency the ammunition it needs.

Comments by Bundesbank President Hans Tietmeyer, coupled with yesterday's surprise German money supply contraction, have convinced the market that credit easing is on the cards.

Tietmeyer was quoted in a Japanese newspaper as saying he would not exclude room for manoeuvre in reducing rates. He also said German inflation was moving in the right direction.-Reuter