Dollar's rise against euro expected to be shortlived

The dollar rose sharply yesterday, pushing the euro below parity for the first time for more than week, on speculation US investors may be forced to repatriate funds in response to the slump on Wall Street.

In late trade, the dollar came off intra-day highs, ignoring modest rises on Wall Street as the familiar worry over the outlook for the US economy continued to plague the market, dealers said.

While US funds continued repatriating profits, the euro found some buying support each time the euro/dollar rate dipped. The dollar's reprieve is expected to be shortlived, they added.

The euro was worth $0.9926, after hitting an intra-day low of $0.9859, compared with $1.0083 late on Monday. The dollar rose against the yen to Y117.34 from Y116.22 the previous evening.

The rally of the dollar was sparked by talk that US mutual funds, faced with record share sales by panicked investors, might be forced to sell their holdings of overseas stocks in order to raise cash.

In Tokyo, vice-president for foreign exchange at Citibank Mr Hidehiko Inamura, said: "I heard. . . there is huge liquidation of funds in the US and they have repatriated foreign investments."

The benchmark Standard & Poor's 500 US stock index plunged 3.3 per cent on Monday to 819.85 points - the lowest close for more than five years.

"There's been a suggestion US mutual funds may have been pulling funds out of Asia and repatriating them in order to pay redemptions to US investors," said Commerzbank currency strategist Mr Kamal Sharma.

However, the analyst said the large move in the dollar's valuation was as much to do with the fact that it had been heavily oversold by speculators. "Nothing much has changed. The fundamentals still point to further dollar weakness but the dollar had been bashed up pretty badly and it was never going to fall in a straight line," Mr Sharma said.

Other analysts were equally unconvinced the dollar would be able to maintain its upward momentum. Standard Chartered currency strategist Mr David Mann said Wall Street had further to fall, which in turn would pressure the dollar.

But Mr Rob Hayward at ABN Amro said the euro would "need to get back above $1.0040 soon" if it was not to incur further losses against the dollar.