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Dollar declines vs mark in Europe

LONDON: The dollar failed to make headway against the mark despite a five basis points decline in the German repo rate as the cut was not enough to change analysts minds about what the Bundesbank would decide tomorrow.

Analysts still expect the German discount and lombard rates to remain steady after Thursday's council meeting, although the extent of the repo cut to 4.45 percent was at the higher end of market expectations.

"We were expecting the repo cut as a technical move and we still don't think there will be a discount rate cut tomorrow," said Lehman Brothers international economist Giorgio Radaelli.

The dollar hardly moved throughout the morning and stood at 1.4078/83 marks at 0948 GMT versus late Tuesday's 1.4102/07. It was equally quiet on the yen at 91.53/63 versus 91.80/90.

German money markets have been flush with funds after reserve requirements for domestic German banks were lowered and today's repo fall, the first in nine weeks, reflects conditions in the money market, analysts said.

"This modest easing implies little reason to change the discount rate tomorrow, with a 45 basis point spread still remaining between the repo and the discount rate," said Credit Suisse economist Time Fox.

The German discount rate stands at 4.0 while the lombard rate is now 6.0 percent.

Belgium lowered its central rate to 4.45 percent from 4.5 percent after the German repo cut, but analysts said other European countries were unlikely to follow suit purely in tandem with changes in German interest rates.

France has for weeks been guiding money market rates back down to levels seen before a new president took office in May.

The Italian lira is no longer part of the European exchange rate mechanism and the peseta is free to fluctuate within a wide 30 percent band. That implies central banks in these countries may be able to give inflation a higher priority than currency concerns when determining credit plicy, which could lead to an increase in rates in the respective countries in the near term.

On the day, dollar bulls were pinning their hopes on keener Japanese investor appetite in the second leg of the U.S. quarterly refunding. Dollar/yen has been supported on hopes last week's deregulatory package announced by the Japanese government will trigger more capital flows into foreign bond markets.

The U.S. Treasury will auction $13 billion in 10-year notes today, followed by a 30-year bond auction to complete the mammoth refinancing schedule on Thursday.

In other trading the pound barely reacted to the July 5 monetary meeting minutes, which showed that Bank of England governor Eddie George's call for higher interest rates was again rebuffed by Chancellor of the Exchequer Kenneth Clarke.

Sterling stood at $1.6002/09 and 2.2541/51 marks at 1026 GMT versus late Tuesday's $1.6000/10 and 2.2568/73. The dollar was quoted at 1.1666/76 Swiss francs against on Tuesday's 1.1686/93.-Reuter