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Dollar takes stock in Europe after recent advance

LONDON: The dollar was keeping the mark and yen firmly under control in Europe on Friday, although it had loosened its grip slightly after a week of gains that has seen the U.S. currency soar to 26-month highs on the yen.

It romped ahead to 109 yen overnight as players tried to take-out stops just above the figure and even breached strong technical barriers against the mark to briefly touch 1.5068 before heavy U.S. fund sales took their toll.

The reversal was exacerbated by a general reluctance by European interbank players and speculators to take-up the baton and the dollar has since drifted lower to 1.5000 marks.

However, dollar downside is seen limited in a market confident that interest rate differentials between the U.S. and Germany will continue to grow in favour of the U.S. and further boost short-term capital flows into the dollar.

By 1045 GMT, the dollar was quoted at 1.5022/27 marks and 108.50/60 yen compared with late Thursday's European levels of 1.5006/11 and 108.46/51 respectively. It started the holiday shortened week at 1.4805/15 and 107.90/108.00.

"The dollar still has a pretty bullish outlook and we think there is a good chance Buba will ease interest rates as soon as next week," said Eric Fishwick at IBJ International.

Fishwick, who is a senior analyst at IBJ, said the market would probably start to speculate about such an outcome ahead of next Thursday's council meeting.

"That speculation could well move the dollar back up towards 1.51 and any dips below 1.50 will prove short-lived." He also expects dollar/yen to move above 109 fairly soon.

Bundesbank president Hans Tietmeyer has kept alive the rate cut debate of late with various comments that have reiterated the view that the central bank is still examining the scope for further easing. Today he told journalists in Zurich that the correction of the dollar could continue.

The main focus today, however, falls back upon the U.S. economy with the release of consumer prices and retail sales figures for March at 1230 GMT.

All eyes will again turn to the bond market reaction to the data, which itself is keeping a wary eye on runaway commodity prices, although signs of decoupling between bonds and the dollar of late should negate the currency reaction.

March consumer prices are expected to rise 0.3 percent, while the core rate is seen rising 0.2 percent. Consumer prices rose 0.2 percent in the overall and core rates in February.

"We look for CPI broadly in line with expectations and retail sales a little below. This may be sufficient to prompt some further short term stabilisation in the bond market, although we would not expect such gains to be sustained," said Chase Investment Bank in a note.

Economists on average predict a 0.3 percent rise in March retail sales and a 0.4 percent increase excluding automobiles.-Reuter