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Dollar fights off profit taking in UK

LONDON: The dollar clawed its way back above 1.41 marks in late Europe on prospects of a German repo rate cut Wednesday and awaited today's start of the U.S. Treasury's mammoth quarterly refunding auction.

Earlier the dollar had eased to near Monday's European close as traders pocketed profits after the recent speedy rise.

The market has factored in a cut of two to five basis points in the Bundesbank repo rate, which has been held at 4.50 percent for nine weeks, analysts said.

A smaller than anticipated cut, or none at all, could pull the rug from under the dollar's feet, they said.

The dollar was quoted at 1.4107/12 marks by 1550 GMT, compared with 1.4062/72 in late Europe on Monday. After hitting an intraday high of 1.4125, it spent much of the latter part of the session dabbling around the 1.4060 marks area.

A slightly larger than expected July fall in West German unemployment raised some questions over whether the economy there was as weak as had been thought, prompting the market to temper its rate easing expectations, analysts said.

Dealers said the Bank of France had been spotted offering dollars at around 1.4110 marks, but bids around 1.4050 had put a firm floor under the greenback.

Against the yen the dollar was well supported ahead of the U.S. Treasury's record $42.5 billion quarterly refunding exercise. The first of this week's three auctions is at 1745 GMT for $18 billion of three-year notes.

The market will scrutinise the refinancing to see whether the Tokyo government's new package to encourage overseas investment sharpens the Japanese appetite for Treasuries.

"Dollar/yen was quite well-bid on hopes the Japanese would be fairly active in the auction," said Pat Magill, head of the corporate desk at Daiwa Europe here.

Although Japanese life insurers and investment banks were seen buying dollars in Tokyo overnight, these were not necessarily earmarked for buying new U.S. bonds, Magill noted.

"They could just have been adjusting their hedge ratios or thinking if they don't go into the auction prices could come off and they'll be able to snap them up cheaper tomorrow," he said.

The dollar was trading at 91.82/91 yen by 1618 GMT, versus 91.25/30 in late Europe on Monday.. Dealers said the 90.50 level should hold, even if the auction was disappointing.

Dollar/yen was helped throughout the session by strength on the mark/yen cross.

Mark/yen stood at 65.10/13, up from 64.90/93 late on Monday.

The dollar shrugged off U.S. data released today. June wholesale sales were up 0.8 percent from May's 0.9, wholesale inventories rose 0.5 percent versus 0.3, and second-quarter non-farm productivity grew 3.0 percent from 2.5 in Q1.

Wednesday's release of the Federal Reserve's Beige Book should prove far more of an attention grabber, analysts said.

"Given all the mixed data at the moment, it's hard for the private sector to be certain as to the near-term direction of interest rates, and so what the Fed currently thinks of U.S. economic conditions will be crucial," said UBS' Cunningham.

The mark had a better day than of late, strengthening to 1126.25/75 lire from late Monday's 1122.80/23.30 and 3.4524/27 French francs from 3.4498/03.

But dealers said the mark's move up was a natural reaction to recent losses, and cautioned that the German currency's undertone remained weak.

The dollar was quoted at 1.1686/93 Swiss francs, up from late yesterday's 1.1645/55.-Reuter