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Dollar trapped in ranges, seen vulnerable
Updated: 2004-12-21 16:13

The US dollar traded in tight ranges against the euro and the Japanese yen on Tuesday ahead of the year-end holidays, but market players said it was only a matter of time before the currency resumed its slide.

With trading activity subdued, many investors and dealers have shied away from the market and left currencies listless.

The dollar's recent recovery from record lows against the euro and a five-year low versus the yen cleared out many bets for the currency to fall, but analysts expect those short dollar positions to reappear when trading picks up.

"The core structure of the market is to be short dollar," said Jake Moore, forex strategist at Barclays Bank in Tokyo. "There's still plenty of interest to buy the euro."

At 1:30 a.m. EST, the dollar was little changed from late New York levels at US$1.3390 per euro, in sight of the all-time low of US$1.3470. Traders said the market was eyeing a euro rise above US$1.3500 in the near-term.

The dollar dipped to 103.90 yen but stayed well above the five-year low of 101.83 hit earlier in the month.

Many market players believe the dollar needs to drop further for the United States to correct its record current account deficit, and that U.S. officials would thus prefer a weaker currency.

So far in 2004, the dollar has fallen 6.4 percent against the euro and more than 3 percent versus the yen. Since its slide began in early 2002, the dollar has shed nearly 50 percent of its value against the euro and 26 percent versus the yen.

Helping to give the euro a small lift on Monday, a European Commission report said the euro was strong but not yet substantially out of line with fundamentals.

Topping off the reasons the market remains negative on the dollar, recent data shows speculators in the Chicago futures pits had a net short position on the euro in the week ending Dec. 14 for the first time since 2001.

They had registered a record net long position on the euro just a month earlier.

Analysts said the big turnaround reflected the profit-taking on speculative short dollar positions in the past few weeks and likely meant the euro was poised to resume its gains against the dollar.


A new US Federal Reserve official, Richmond Fed President Jeffrey Lacker, said in his first speech that a weaker dollar shouldn't spark inflation and would help boost exports and limit imports.

But he also said if a slowdown in productivity growth prompted companies to raise prices, the Fed may need to be more aggressive in its credit tightening campaign.

For Barclays' Moore, one factor in 2005 that could help reverse the dollar's downtrend would be if the Fed gets worried about inflation and officials suggest the central bank will jack up the fed funds rate more quickly.

On Thursday the Fed's favored inflation gauge -- the core PCE index -- will be released and is expected to show a gain of just 0.1 percent in November.

That would keep year-on-year U.S. core inflation at 1.5 percent, right in the middle of what's believed to be the Fed's preferred range.

For now the Fed has repeated its commitment to pushing rates higher at a "measured" pace, as Lacker did.

The dollar has received little help even as U.S. official rates have more than doubled in less than six months to 2.25 percent and now stand above those in Europe and well above Japan's virtual zero level.

"Interest rate differentials can provide nothing more than an excuse for position adjustments," said Masamichi Koike, forex manager at Sumitomo Mitsui Banking Corp.

"I think the market will test recent lows again."

Elsewhere, sterling eased to around US$1.9440 from around US$1.9465 after data showed British house prices fell at the fastest pace in 12 years in November.

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