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Dollar Theme to Shift from Data to Policy

By Laurence Norman And Steven Vames
Dow Jones Newswires
Monday, April 4, 2005

http://sg.biz.yahoo.com/050403/15/3rnyu.html

NEW YORK -- Last week it was all about the numbers. This week the
dollar's fate may be wrapped in the nuances of central bank policy.

With few significant economic data releases due, currency markets
are likely to take their cues from a busy lineup of speeches by
Federal Reserve officials and foreign central banks holding policy
meetings. That will be somewhat of a departure from last week, when
the dollar eked out some slight net gains in volatile trading amid a
heavy line up of U.S. and foreign data.

U.S. nonfarm payrolls data, the Institute for Supply Management's
indexes, inflation statistics, and Japan's tankan survey were on the
market's mind last week. The dollar had entered the week on a high
note after Federal Reserve policymakers said in a statement March 22
that they have grown more concerned about U.S. inflation.

Due to that focus on inflation, many of the dollar's movements have
tracked that of the 10-year Treasury yield, since investors are
closely watching the dollar's interest rate differentials with other
major currencies.

On Friday, the euro moved lower, slipping to $1.2903 from $1.2957
late Thursday. The single currency ended its third-consecutive week
of declines, down modestly from the $1.2949 where it started the
week. Versus the yen, the dollar rose to Y107.57 from Y107.20 late
Thursday, and it ended the week higher than Y107.19 where it
started.

Also Friday, the dollar rose versus the Swiss franc to CHF1.2030
from CHF1.1961 Thursday. The pound slipped to $1.8800 from $1.8891,
and the euro was fairly steady at Y138.85 from Y138.95.

"At the moment the focus is -- probably rightly -- on interest
rates," said Jim McCormick, global head of foreign exchange at
Lehman Brothers in London.

However, McCormick said, the market's narrow view that any sign of
inflation will be good for the dollar may run its course. "If
there's truly a weaker trend in growth and inflation is stronger,
it's not a dollar-positive scenario," he said.

Aziz McMahon, currency strategist at ABN Amro in New York, said that
after the ups and downs in the dollar and in yields Friday, "the
market is left with not a lot of direction after a mixed bag of
numbers and heading into a data-light week," he said.

However, McMahon said the dollar did seem more vulnerable to a
decline this week for several reasons. One is positioning, with
investors becoming increasingly long dollars versus the yen this
week and slashing short, or bearish, dollar positions versus the
euro and the Australian dollar, according to the latest IMM data
from the Commodities and Futures Trading Commission.

The data also showed investors were short U.S. 10-year Treasury
futures, McMahon said. If those positions are reversed, bond yields
will fall and that will add to the pressure on the dollar.

McMahon added that any kind of hawkish language from the ECB could
increase hopes of a euro-zone rate hike sooner rather than later.

Attention this week will be on a series of central bank-related
events. In the U.S., Federal Reserve Chairman Alan Greenspan makes
two speeches and testifies Wednesday in the Senate on government-
sponsored enterprises reform. He will speak on energy issues Tuesday
and on consumer finance Friday.

On Monday, Fed Governor Edward Gramlich will speak at a National
Press Club luncheon in Washington, and Philadelphia Fed President
Anthony Santomero will speak in front of a National Economists Club
luncheon in Philadelphia.

In addition, there are decisions on interest rates from the Bank of
England and the Reserve Bank of Australia, while the Bank of Japan
and the European Central Bank also hold meetings. The Bank of Canada
will also release its business outlook survey Monday.

Only the RBA is expected to lift interest rates, but the market will
be on the outlook to see what Japan says about its current account
balances policy and what the ECB says about growth prospects.

On Monday morning in Japan, the Ministry of Finance will hold a
press conference to discuss its foreign exchange reserves. While
some in the market have speculated the meeting will address
diversification, a MOF official said there would be no changes
announced in the country's reserve policy, according to media
reports.

In the coming days, however, there's relatively little data,
inflation or otherwise, for the market to wrap its bets around. That
will leave investors to coax the finer points of any comments that
the Fed makes about inflation, and its implication for any impending
changes to the pace of interest rate increases.

Indeed, on Friday, the market's true stripes were shown when,
despite a knee-jerk selloff on a poor showing for U.S. job creation
in March, the dollar roared back after Chicago Fed President Michael
Moskow, speaking on CNBC, reminded markets about the Fed's inflation
concerns. The dollar then extended its gains after a price component
of the Institute for Supply Management's manufacturing index showed
a sharp rise.

"The dollar's slide in the aftermath of the payrolls' release was
more than reversed about an hour later, reflecting a boisterous
improvement in sentiment for the dollar that is widely founded on
the Fed's resolve to raise interest rates," wrote Ashraf Laidi,
chief currency analyst at MG Financial in New York, in a research
note.

The only important U.S. data due this week will be February
wholesale inventories and initial jobless claims Thursday.

Elsewhere, investors get another look at the Japanese economy
Tuesday when total households spending is reported, while machinery
orders data comes Friday.

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