Dollar well supported as speculators prime expectations on interest rates

 

THE dollar has continued to gain ground, pushing to seven month highs on expectations of a widening gap in interest rates between the United States and Germany.

However, profit taking and dollar sales by European exporters took some of the gains from the US currency late yesterday. However, Economists expect it to remain well supported by strong economic data from the US and the prospect of lower German interest rates following evidence of the country's sluggish economy.

"The dollar wants to go to its next target of 1.5045 deutschmarks but it will struggle. Right now its a battle between the speculative buyers pushing it up and European exporters that want to sell," said a dealer at a British bank in London.

It reached a new 1996 high of DM1.5020 earlier yesterday but was trading slightly lower at DM1.4973 at the end of the European day.

The dollar's strength was due to US job creation figures that were much better than expected, reigniting speculation about a rise in US interest rates.

At the same time, the German economy showed no signs of being ready to climb out of its trough, despite the dip in the German unemployment rate in March, to 10.8 per cent against 11.1 per cent in February.

Analysts are now expecting the Bundesbank to reduce interest rates, which would help the dollar. The Bundesbank council is due to meet next week.

The pound held on to its gains and was trading at DM2.3495 at the close from DM2.3494 a day earlier, It also rose to 103.34p against sterling after opening at 103.15p.

Dealers said there was good offshore interest and the currency looks "well supported" at these levels.

So far, the dollar's rally has been fuelled by short term, speculative players with few long term investors participating. There is no shortage of dollars, however, with many exporters willing to sell the currency at any levels above DM1.50.

Against the yen, the dollar slipped back from its 26 month high of 108.70 yen seen in early trade and was trading at 108.45.

The Bank of Japan governor, Mr Yasuo Matsushita, said earlier that monetary policy would focus on securing economic recovery.