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Dollar dips in NY after Buba ease

NEW YORK: The dollar finished sharply lower on Thursday after a rollercoaster ride set off by the Bundesbank's surprise cut in German interest rates.

The dollar initially rose against the mark after Germany cut its discount rate and Lombard rates by half a percent each to 2.50 percent and 4.50 percent respectively.

But a steep rise in the yen against the mark dragged dollar/yen lower.

When the dollar could not muster enough momentum to break above its 14-month high of 1.5136 marks, it turned around and sank quickly, dipping as low as 1.4965 marks.

"Dollar weakness versus the yen spilled over into dollar versus the mark. We had a disappointment trade when the dollar didn't go higher on the Bundesbank rate cut," said Anne Parker Mills, currency analyst at Lehman Brothers.

The dollar fell to 106.69/74 yen from 107.77/80 at the open and to 1.5020/30 marks from 1.5090/00.

The sharp drop in the mark/yen cross from a high of 71.94 to a low of 70.97 came as interest rate differentials between Japan and Germany narrowed and were seen shifting in favor of the yen going forward.

"Yen interest rates only have one way to go which is up," said James Kemp, chief foreign exchange dealer at Citibank. "The differential is going to move back in the yen's favor.

"There has been a lot of interest to sell marks for yen," said Kemp. "It is quite possibly the trade of the day. There have been a lot of different sellers."

The improved economic climate in Japan has the market expecting yen interest rates to go up soon while German official rates are seen remaining low for a while.

"Pressure is building on the mark versus yen," said Mills. "The German economy is slow while the Japanese economy is recovering more rapidly."

Among the sellers were said to be hedge funds and one options player was rumored to have sold some $500 million of marks for yen to hedge a position of about $2.5 billion in options betting the mark would fall versus the yen in a month.

Kemp said the breakdown of the mark/yen cross below 71.60 triggered some technical stop-loss selling that accelerated the decline.

"The cut in rates in Germany reinforced the idea the yields between Germany and Japan were moving in Japan's favor," said Dan O'Connell, vice president of institutional foreign exchange at First Chicago NBD Bank. "The bands narrowed to the advantage of the yen."

The Bundesbank, which last cut official rates in December, said its decision was based on a favorable inflation outlook.

The German central bank also sent a clear signal that it wants the dollar to continue to rise against the mark. Bundesbank President Hans Tietmeyer Tietmeyer welcomed the dollar's recent recovery and said it did not need to end.

However, the dollar may have been hurt by the idea that German rates, now at historic lows, will not likely go lower.

European Monetary Institute President Alexandre Lamfalussy said he believed the German discount rate had hit a floor at 2.5 percent.

Canada, Holland, Belgium and Australia also cut rates, following Germany's lead.

The dollar fell to 1.2176/84 Swiss francs from 1.2293/03 at the open. Sterling rose to $1.5180/87 from $1.5090/00. The dollar rose to Canadian $1.3630/35 from $1.3558/63. The Australian dollar closed at $0.7826/31. -Reuter