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Dollar edges higher after

German rate cut

LONDON: The dollar staged a brief rally in Europe on Thursday after the Bundesbank took markets by surprise with a cut in official German interest rates, but the advance by the U.S. currency quickly lost steam.

The German central bank cut its key discount rate by 50 basis points to a near-record low of 2.5 percent and also cut its five percent Lombard rate to 4.5 percent.

"I would have thought a 50 basis point cut would be caused a larger rise in the dollar but I think we will end the day higher," said one dealer at a U.S. bank in London. "For the dollar to get above 1.51 marks, we would need to see further weakness on the European crosses."

By 1120 GMT, the dollar was at 1.5090 marks and 107.80 yen compared with 1.5040 and 107.90 just ahead of the rate announcment. It was trading at 1.5070 and 108.20 in late European dealings on Wednesday.

It briefly pushed above 1.51 marks after the cut but some disappointment by the markets that the Bundesbank kept its repo rate fixed at 3.30 percent for the next two tenders took the shine off the currency, said dealers.

However, others said that despite the fact that the cut probably heralds the end of the interest rate easing cycle in Germany, the Bundesbank's decision to leave the repo rate at 3.30 percent keeps the way open for further repo cuts.

The Bundesbank said the fact the repo was left unchanged left scope for further interest rate decisions.

Tony Norfield, an economist at Dutch bank ABN AMRO in London said the Bundesbank would steadily drop its repo rate to 2.80 percent. "I think the chances of Buba reversing this (official) rate cut by the year end are very slim indeed," he said.

German Finance Minister Theo Waigel welcomed the Bundesbank's decision to cut rates, saying it was supportive of government attempts to stimulate the economy and that it reflected stable prices.

The timing of the move caught markets by surprise but not the size, analysts and traders said.

"The move is not an enormous surprise," said Peter von Maydell, an economist at U.S. bank First Chicago in London. "It has had more of an impact on the interest rate market where short rates jumped."

The Bundesbank also said it expected German money supply growth to slow before long and that current data exaggerated the development of money supply.

Provisional M3 money supply growth slowed to an annualised 12.2 percent rate in March after growth of 12.8 percent in February, the central bank said.

Many economists had speculated that recent strong growth in money supply would deter the central bank from cutting rates at today's council meeting.

Austria followed Germany's lead and also chopped 50 basis points off its discount and Lombard rates to 2.5 percent and 4.75 percent respectively. However, the Bank of France left its intervention rate unchanged at 3.70 percent.

"We are going to see a weaker mark in the next few months given interest rate differentials and the general policy mix, it is clear that Germany does not want the mark to strengthen," said Norfield at ABN AMRO.

He saw the possibility of the dollar rising to 1.5150 marks and beyond in the next month.-Reuter