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Dollar confused in Europe

LONDON: The mark's drop below 70 yen overnight has muddled the dollar's immediate outlook further because it poses a threat to dollar/yen but a bonus to dollar/mark, analysts said.

The mark has plunged two yen since the Bundesbank cut its key discount and Lombard rates last Thursday and chartists are bracing for a drop below key support near 69.70, which is derived from the lows set in December.

"As far as investors are concerned, they're generally biased against the mark, a bit pro-dollar, and iffy on the yen," said Tony Norfield, treasury economist at ABN-Amro in London.

The dollar was slightly firmer at 1.5218/23 marks at 0730 GMT compared with late Tuesday's 1.5172/82, while it was steady on the yen at 106.46/50 versus 106.43/48.

U.S. hedge funds have been seen as aggressive mark/yen sellers in the recent downturn, but analysts said that capital flows by investors also suggest a desire to scale back investment in bunds as they buy more yen bonds.

Against the backdrop of the mark's decline against so-called "high-yielders" like the lira, selling mark/yen is likely to remain the surest strategy until the dollar's direction against the majors becomes more clear-cut, dealers said.

That strategy is likely to remain in place so long as expectations of further cuts in the German repo, which was allotted at 3.30 percent this morning, dominate the market.

The mark rebounded back above 70 yen by 0743 GMT but was still lower than its Tuesday European close of 70.14/17.

Although the dollar has added five pfennigs to its worth in just two-and-a-half weeks, dealers said sentiment was not all-out bullish.

"I'm anticipating the mark crosses will correct a bit because it's oversold and that'll make it doubly hard for dollar/mark to keep on going," said a UK bank dealer in London.

The mark was faring slightly better against the lira in early Europe, quoted at 1022.22/65 against Tuesday's 1021.80/2.20. The new Italian government's priority will be putting the lira back into the ERM after it dropped out in September 1992, and centre-left leader Romano Prodi said a rate of 1000-1050 would be right for its re-entry.

Data due today include U.S. March durable goods orders at 1230 GMT. A Reuter poll forecasts orders to have declined 0.3 percent in March compared with a 2.5 percent drop in February.-Reuter