Spine put back into the dollar

BETTER than expected first quarter growth figures in the US of 1.9%, against earlier estimates of 1.6%, put some spine back into the dollar yesterday.

By the end of the day it was worth $1.1805 against the euro, back fractionally from the previous highs of over $1.19.

All eyes are fixed on the ECB, now expected to cut interest rates by 0.5% next Thursday. That expectation rose sharply yesterday following comments from ECB economist Otmar Issing, one of the staunchest proponents of curbing inflation in the bank.

Economists believe the lead up to next Thursday will result in some easing of pressure on the dollar in the sort term. It is possible that if the 0.5% cut is delivered the dollar will rally to $1.11/1.12 to the euro in the short term as currency investors find the euro less attractive.

But Niall Dunne, chief economist Ulster Bank Financial Markets believes the pressure will return in the coming months.

One of the big concern for analysts has been the failure of the US to bounce to the extent some had hoped in the post-Iraq environment.

The general view is that investors want to see more certainty on the US situation before the dollar can be expected to halt the present slide.

In the past, the currency and the stock markets operated in tandem, but Mr Dunne reckons the two cannot be linked in the same way any longer.

Following the dollar recovery yesterday the markets did very little. In London the FTSE was up a modest 11 points while in late evening trading the Dow was up just 40.

In the short term, the state of the US economy will be key in how the currency performs.

In the past 18 months we have seen the dollar go from a high of 0.82cents to the euro to this week’s low of over €1.19.

Some say the rally could hit $1.30 in the months ahead but Mr Dunne believes that is overdone given the 40 cent gain the euro has made since it started to regain lost ground over the last year and a half.