Dollar gains as Argentina worries ease

London, July 17: The dollar rose to one-week highs against the euro, the yen and the Swiss franc on Tuesday, as the outlook for emerging markets brightened after Argentina’s government won opposition support for spending cuts.

Analysts said the Argentine plan to stave off default supported the dollar, as emerging market woes had previously been forcing investors to unwind emerging market positions funded in euros, yen and Swiss francs.

“We have had some respite in emerging markets,” said Claudio Piron, treasury economist at Standard Chartered.

“There is therefore less of a need for the unwinding of carry trades that we have been seeing last week,” he said, referring to investors reversing trades which had involved borrowing in low-interest currencies like the Swiss franc and yen and investing in higher-yielding assets.

The yen came under modest pressure after two of Japan’s top ministers said there was more that monetary policy could do to support the economy, so reinforcing expectations of a further easing from the Bank of Japan.

Finance Minister Masajuro Shiokawa said he would be telling the bank that monetary policy was an important factor in preventing falls in prices.

Economics Minister Heizo Takenaka said monetary policy could do more to help the ailing economy and noted the BOJ had promised to take decisive action if a crisis destabilised Financial markets. BOJ Governor Masaru Hayami also said that markets should decide currency levels and that downside risks to the economy are somewhat stronger.

“The Hayami comments suggest the BOJ seems to be getting increasingly pessimistic,” said Jeremy Hawkins, Chief economic adviser at Bank of America in London. “It now seems they might be moving closer to the Finance Ministry position and tolerate a weaker yen,” he said.

Traders said volume was thin but with an upbeat tone for the dollar ahead of Federal Reserve Chairman Alan Greenspan’s Congressional testimony and key US inflation data on Wednesday.

“There is an assumption Greenspan will come with optimistic words, which will help all U.S. Asset classes,” said Michael Metcalfe, currency strategist at Credit Agricole Indosuez in London.

Sterling lost ground for the second day on the back of merger and acquisition news after Royal Bank of Scotland announced it would buy the retail arm of Mellon Financial Crop for $2.1 billion.

On Monday, the pound lost ground on news that British Petroleum would buy part of Germany’s E.ON for 6.5 billion euros. The underlying rate of inflation in Britain remained steady at two-year highs of 2.4 per cent year-on-year in June, denting any lingering hopes of a near-term rate cut. Sterling weakened to four-week lows against the dollar of $1.3932 and was trading around 61 pence per euro, near three-week lows set on Monday.

-- Reuters