7 November 2001, 09:39 Forex - Dollar eases in midmorning Tokyo on yen short-covering after Fed cut
TOKYO (AFX-ASIA) - The dollar was easier in midmorning trade on yen
short-covering as the US currency continued its recent consolidation
after the Federal Reserve's decision overnight to cut rates by 50 basis
points, dealers said.
They said the dollar came under pressure overnight after the Fed's
statement suggested the economy may be worse than anticipated, although
the currency is expected to continue to be supported by the aggressive
easing stance.
Deutsche Bank senior currency strategist Kenneth Landon said the
dollar was weaker on yen short-covering but added that it is likely to
continue higher against major currencies after the recent consolidation
has run its course.
"There's probably a little bit of resistance on dollar/yen from
short term players. They're getting a little bit fed up. A lot of
people were hoping dollar/yen would test the upside of the 125 range,"
he said.
"Some of those may be liquidating but we don't see any major
activity so far in Tokyo," Landon said.
"We're just in this consolidation phase now but I think the rate
cuts by the Fed are actually going to be good for the dollar against
the yen.
"I think what we saw with the rate cut is that it was as expected.
The pattern has been this year for the dollar to be trading strong
while the Fed has been cutting rates.
"After the consolidation is over, we're going to see a test of the
upper side of that range, 123, breaking above there and maybe getting
to 125 certainly by the end of the year. I think that's possible,"
Landon said.
BankOne forex vice president Masahiro Ishikawa described the
reaction of the dollar/yen to the US rate cut as a "little bit
strange", noting that the dollar had been higher earlier against
broader cross rates.
"People are still talking about the next (US rate) cut in December.
They are always talking about the US economy picking up" even as this
gets put back quarter by quarter, Ishikawa said.
By contrast, "in Japan we cannot say the economy will recover in a
year or two years too easily," he said, adding that it is this
difference in confidence that is supporting and will continue to
support the dollar/yen in the mid-term.
Meanwhile, the increasing differential in real interest rates
between the US and Japan is unlikely to benefit Japan, even as the US
enters the territory of negative real rates as nominal rates fall below
inflation.
"When people have nothing else to talk about they talk about
interest rate differentials," Ishikawa said, but most are relatively
unsophisticated in economics and will continue to look at the nominal
interest rates.
Separately, the euro continues to look soft against the dollar,
given the much less aggressive easing stance of the European Central
Bank, which is due to decide on monetary policy at a meeting on
Thursday.
"The fact that the Fed has been so aggressive in cutting rates is
definitely putting the spotlight on the need for central banks to be
proactive," Deutsche Bank's Landon said.
"The ECB has been sitting on its hands. We expect they'll cut rates
25 basis points on Thursday but you can see the Fed just cut 50," he
said.
"I think what the market is really focusing on, as you can see with
the equity markets in the US, is that even though the current economic
conditions are really weak, basically they're pricing in a recovery
starting next year."
The euro is likely to head lower, particularly if the ECB fails to
cut rates again this week.
"If they don't cut rates we could see a test down to 0.8810. If
they actually cut rates, I wouldn't be too excited about it, but I
think that would put some support on the euro/dollar," Landon said.
BankOne's Ishikawa said he expects the ECB to cut 25 basis points
at most, adding that the market will not react positively even if rates
are lowered.
"I myself don't think they will do anything," he said, adding that
the euro could head towards 88 cents following the decision.
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