Further dollar weakness forecast after disappointing US data

Currency strategists were increasingly confident this week in their predictions of further dollar weakness, as the euro inched ever closer to its lifetime high, but a hefty sell-off late yesterday reminded investors how jittery trading sentiment can be.

Following data showing a drop in US consumer confidence and an unexpectedly large widening in the trade deficit, the euro yesterday climbed to $1.2893, just short of its $1.2898 lifetime high. But it ended European trade at €$1.2779 as a combination of market gossip and profit-taking sent it tumbling.

Traders said investors had extended their long-euro positions after the euro broke above $1.285 in European afternoon trade.

But the euro's failure to reach a new peak led the same investors to scale back those holdings.

The profit-taking, made more significant ahead of a US market holiday on Monday, coincided with reports of a large sell order from a European national central bank, which raced around the market as rumoured intervention.

"The market put two and two together and made seven," said Mr Nick Parsons, head of currency strategy at Commerzbank.

The euro-zone central banks conduct their own foreign exchange business and it has not been unusual to see large euro selling around what could be key levels for the single currency.

The orders will be described as simple commercial business, but some market participants have suggested that the timing of the orders is strategic.

"These banks would not be unhappy to see clumsily executed orders at these euro levels," added Mr Parsons.

In spite of yesterday's pullback, strategists were confident the dollar's downward trend was still in place following a series of events this week.

The overall tone was set on Monday by the Group of Seven rich nations' weekend communique.

Despite a warning of the dangers of "excess volatility" and a greater emphasis on the need for Asian currencies to become more flexible, investors largely read the group's statement as a reiteration of acceptance of a weaker dollar. - (Financial Times Service)