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Dollar sets new highs against mark, Swiss at U.S. close

NEW YORK: A buoyant dollar logged new highs against the German mark and Swiss franc at Monday's close amid widespread market expectations for an imminent cut in German interest rates.

Anticipation of a German rate cut as early as Thursday coupled with renewed optimism on European Monetary Union after a crucial meeting of ministers in Italy at the weekend weighed on the mark, market analysts said.

Additionally, currency dealers said the Swiss franc was weakened by speculators taking advantage of low Swiss interest rates to finance investments in higher-yielding assets.

The dollar closed at 1.5131/34 marks, the highest close since February 1995, up from 1.5107/12 at the open. It ended at 1.2348/58 Swiss francs, the highest closing level since March 1995, and up from 1.2305/15 at the open.

Dollar/yen firmed to 108.57/60 from 108.47/50.

The dollar touched a high of 1.5136 marks during the New York session and traded as high as 1.2352 Swiss francs.

Dealers said dollar/yen was boosted in the afternoon by a news agency report quoting an unnamed Treasury official as saying the dollar/yen exchange rate could soon reach 110, a key psychological and technical level.

"There is good buying ahead of the Bundesbank meeting," said Lizbeth Goldberg, a dealer at Bayerische Hypobank. "There is a lot of expectation for an ease and that is priced into the market."

She said those expectations were driving dollar-buying.

"People are looking for the dollar to go higher. More and more people are jumping on the dollar-bullish bandwagon," Goldberg added.

Bundesbank President Hans Tietmeyer reinforced those expectations with a statement over the weekend interpreted as an endorsement for a higher dollar and weaker mark.

Tietmeyer said Saturday he would welcome a further normalization of the deutschemark exchange rates.

The mark also fell against some of the higher-yielding European currencies such as the Italian lira and French francs following the outcome of a weekend strategy session on European Monetary Union (EMU) in Verona, Italy.

European ministers agreed on a new incarnation of the European Exchange Rate Mechanism which would loosely link to the single currency those currencies of countries which do not qualify for EMU. That arrangement would presumably promote greater currency stability than past attempts, analysts said.

Another hurdle to monetary union was overcome when Germany and the European Commission reached a compromise over fines for countries transgressing an agreed budget deficit ceiling.

Bob Lynch, currency analyst at MMS International, said during times of uncertainty about EMU, investors had bought up marks and Swiss francs as safe-haven currencies.

"There is a reduction in the defensive demand for Swiss francs and marks as market perceptions grow that some form of EMU will come out along the (Maastricht treaty) guidelines," Lynch said.

Dealers said the Swiss franc has also been undermined by increased borrowing by speculators. The 1.5 percent discount rate allows speculators to cheaply fund investments in higher-yielding assets, much as Japanese rates did months earlier.

In other trading, the British pound fell to $1.5075/82 from $1.5079/87. The dollar firmed to Canadian $1.3557/62 from 1.3550/60. The Australian dollar ended at $0.7899/04 down from $0.7908/13.-Reuter