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Dlr ends lower in Europe, rally on Buba cut fades

LONDON: The dollar ended lower against the German mark here after a wave of profit-taking prompted a sharp retreat from six-month highs set shortly after the Bundesbank announced a half-point cut in its discount rate to 3.5 percent.

The dollar stalled at a 1.4990-mark intraday peak, its highest since February but shy of the psychological 1.50 barrier. It then lost up to 2.5 pfennigs by the close.

"The dollar's reaction to the rate cuts had been fairly muted, and there was major selling above 1.4950 marks," said Brian Martin, chief economist forex at BZW.

A set of weak U.S. economic data exaggerated the drop.

At 1450 GMT, the dollar was at 1.4775/80 marks, down from 1.4785/90 late yesterday. Against the yen, the dollar was 96.61/68, up slightly from 96.28/33 late on Wednesday.

Shortly after the Bundesbank rate reductions,which included a half-point Lombard rate cut to 5.5 percent, speculation circulated that the discount rate cut would be the last in the cycle and this bolstered the mark, traders said.

An unexpected 1.7 percent drop in U.S. durable goods in July and a robust 10,000 rise in weekly U.S. jobless claims then pulled the rug from under the dollar. Short-term, long positions were frustrated and their liquidation accelerated the decline.

"More than anything else this looks like an interbank market that overextended its long positioning and the tendency for a quick exit to book profits snowballed," said Julian Callow, economist at Kleinwort Benson.

But Callow said he is confident that longer-term investors, still building up long-dollar positions, will prove durable holders of dollars when they have completed position-building.

Even though the market did not take the bait today, partly because of the dollar's overbought condition, the Bundesbank rate cut in the face of mark weakness is a rare invitation from the central bank to sell its currency, some analysts said.

Pointers toward a Bundesbank rate cut abounded this week, and the Bundesbank itself cited a shock 0.4 percent annualised contraction of July M3 money supply growth, announced yesterday, as a major reason for today's cut.

Comments earlier this week by Bundesbank president Hans Tietmeyer about the scope for further easing, and both official and survey data pointing to a weakening German manufacturing sector, added to the easing backdrop, analysts said.

The Austrian, Belgian, Dutch and Danish central banks all followed the Bundesbank and cut key interest rates, but the Swiss National Bank and Bank of France left rates on hold.

"The risk of further weakness in the real economy, moderating inflation, contracting money supply and an overvalued exchange rate all suggest the Bundesbank will not be unduly concerned about mark slippage," said Callow at Kleinwort.

The west German states of North-Rhine Westphalia and Baden-Wuerttemberg both reported 0.1 percent declines in their cost-of-living indices in August before today's rate cut, bringing annualised inflation down to just two percent.

For the dollar, however, the biggest problem now lies in the technical and chart outlook which has set up the 1.50-mark level as a formidable barrier, traders said.

Support for the dollar today emerged about 1.4750 marks as wariness about a fresh bout of central bank intervention tempered losses. The dollar/yen's drop to 96.0, its lowest level since last week's concerted central bank buying, also helped raise the spectre of intervention, traders said

Still, chartists said the dollar now needs to push higher in order to extend the longer-term rally.

"Continued consolidation would signal it can't stand up without intervention," said Brian Kiely, treasury technician at Royal Bank of Scotland.-Reuter