Euro sinks as markets cheer US recovery prospects

London, January 25 : | Updated: Jan 26 2002, 05:30am hrs
The euro sank to a six-month low against the dollar and a one-week trough versus the yen on Friday as optimism grew about a quick turnaround in the US economy.

In testimony to a Senate committee on Thursday, Federal Reserve chairman Alan Greenspan expressed cautious optimism about a US recovery, raising the appeal of dollar assets and fanning speculation the Fed will keep rates unchanged when it meets next week.

“It’s a global dollar strength story because the outlook for the US economy is better than the eurozone,” said Julian Jessop, chief european economist at Standard Chartered said.

“The Fed will leave rates unchanged while keeping its bias towards easing. The market ruled out the possibility of easing by the European Central Bank in February.”

By 1056 GMT, the euro shed a full cent against the dollar to $0.8670, bringing its losses this month to 2.4 per cent. Even against the yen the single currency lost more than a full yen on the day to stand at 116.92.

“The euro just tanked when stop-loss orders were triggered on the break of $0.8730,” a London-based bank dealer said.

“The market is more confident of buying dollars after Greenspan’s speech and it looks like everyone that had gone long of euros has bailed out.”

The buoyant dollar hit a 6-1/2 month high on the FINEX trade weighted index, bringing its gains since September to nearly seven percent to move close to 15-year highs hit in July.

“The market is basically buying into a US recovery. So far there is little sign of improvement in the economy in the eurozone and absolutely none in Japan,” said Lee Ferridge, head of global currency strategy at Rabobank.

The futures market is now pricing out almost any chance of a further easing and June eurodollar futures have priced in almost 50 basis points of tightening.

The Federal Reserve Open Market Committee begins its two-day meeting next Tuesday. The decision is expected at 1915 GMT on Wednesday.

“The market is also looking ahead to key data from the US next week and I think data will be upbeat to confirm the recovery story,” Ferridge said.

Investors were focused on the release of ISM (formerly NAPM) US manufacturing survey and employment report next Friday, which many expect could potentially hurt the euro further.

For now attention was focused on Italian cities’ inflation data due out later in the morning.

Analysts said these figures would provide the first indication of the extent that the introduction of notes and coins earlier this month pushed up prices. And it could increase pressure on the euro if investors reckon this could push the prospects of eurozone rate cuts even further off.

The yen trimmed losses against the dollar to stand at 134.52 from a three-year low of around 134.95, thanks largely to its gains against the euro.— Reuters.