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Dollar ends higher in Europe

after setting 1996 highs

LONDON: The dollar rose to its highest level against the mark in seven months in Euroep, testing the psychological 1.50 barrier in the process, and pushed to new 26-month highs against the yen as expectations of higher U.S. interest rates buoyed sentiment.

Dealers said the dollar is now gunning for last September's high at 1.5045 to accelerate the move higher. Although news of a 26,00 rise in March German unemployment today confirmed the contrasting U.S. and German labour market trends this year, the rise was slightly lower than expectations and deprived the dollar of extra fuel to sustain a move above 1.5050 for now.

"The encouraging thing about the firm dollar bid today was that there little fresh intraday news to motor it and yet there was no shortage of demand," said a senior dealer at a Swiss bank here. "We may need a little patience about these levels for now but we think a break of 1.5050 is just a matter of time."

At 1525 GMT, the dollar was trading at 1.4991/96 marks, up from 1.4930/39 late Tuesday but off the early peak at 1.5050. Against the yen, it was at 108.50/55, up from 18.17/27 but also off fresh highs at 108.70.

Chart analysts said any retreat from here will be limited to 1.49256/50 support, while a break of 1.5050 will target 1.55.

Prising the U.S./German yield spread apart has been a shocking contrast in U.S. and German employment trends, where German jobless rose a combined 135,000 in February and March and U.S. non-farm payrolls rose 764,000 in the same period.

At present, U.S. 10-year yields are 25 basis points over German equivalents compared with being 30 basis points below them in January.

"The dollar has been driven by the yield play and the expectations that capital flows will follow the rise in U.S. yields in the absence of asset market volatility," said Adrian Schmidt, economist at Chase Investment Bank.

"I think it all remains calm as long as we remain below 1.5050 and while this could remain a barrier for a while, a shift higher is likely within the next month," said Schmidt.

While the yawning yield gap buoys dollar/mark, dollar/yen is lifted by talk the Bank of Japan will have to continue to provide liquidity and easy credit, especially if the government forbids using budget money to wrap up mortgage firms.

If the government stops using taxpayers money in this respect, the expectation is the Bank of Japan will have to keep interest rates low and the yen easier to guard against existing frailties in the banking system spilling over again.

The rise in economic activity in Japan, meantime, is helping shrink the country's current account surplus, which fell to 745.9 billion yen in February from 1.22 trillion a year earlier.

"The thing people say about dollar/yen is that what can't go down, must go up, and with the Bank of Japan virtually guaranteed to be on the bid about 105, the downside has been cut off," said Schmidt at Chase.

Elsewhere, the Swiss franc suffered disproportionately against the higher dollar, sliding against the mark as well. This often happens in dollar rallies because the cheapest funding currency in Europe is typically the Swiss franc.

The French franc stormed below 3.409 marks for the first time in more than two years, meantime, helped by optimism about European monetary union ahead of the Verona EU finance ministers meeting as well as positive economic effects of a rising dollar. The Bank of France declined to comment on talk it intervened to slow the rise, but is expected to cut interest rates tomorrow.-Reuter