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Thursday February 24, 2005 - 08:25:26 GMT

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Dollar edges down despite outlook for higher rates


The dollar inched lower on Thursday as dealers worried about whether the currency could sustain a two-month rebound, even after the Federal Reserve reiterated its commitment to raising interest rates.

The dollar had hit a six-week high against the euro on Wednesday after South Korea and Japan's central banks reassured investors they would not sell dollars to diversify their assets.

Minutes from the Fed's Feb. 1-2 meeting, released on Wednesday, had also supported the dollar by reiterating the Fed would raise rates at a measured pace, but could move faster if inflation risks increased.

Dealers said, however, that the dollar had failed to sustain its gains as many traders were still wary about calling an end to the currency's three-year downtrend despite its rise over the past two months.

"Until we get some strong data on the (U.S.) economy, the dollar will probably gradually drift lower," he said.

The dollar has clawed back from heavy losses to gain over two percent against the euro and the yen so far this year, as rising short-term U.S. interest rates helped to overshadow persistent worries about U.S. deficits.

The euro had edged up around 0.2 percent to $1.3240 by 06h40 GMT, but was short of Wednesday's six-week high of around $1.3260 and still well below a record peak of $1.3670 struck in December.

The dollar was down 0.1 percent on the day at around 104.75 yen, after having risen to 105.12 yen after the Fed minutes were released.

The dollar had tumbled to a two-week low of around 103.80 yen earlier in the week after reports that South Korea could shift its foreign exchange reserve holdings out of dollars sparked speculation that other central banks might follow suit.

South Korea's central bank said again on Thursday that it had no plans to sell dollars in favor of other currencies. Japan's Finance Ministry told Reuters on Wednesday that it also had no plans to sell dollars from its near $850 billion war chest, the biggest foreign reserves in the world.

Worries that the world's central banks, especially in Asia, are shifting reserves away from the dollar and making it more difficult for the United States to fund its massive current account gap have helped fuel the dollar's three-year decline.

Many analysts say the dollar will likely stay stuck in tight ranges ahead of a raft of upcoming U.S. data, including revised growth figures on Friday and employment data on March 4, that could shed further light on the economic and rate outlook.

In contrast, data last week showed that Japan's economy was in recession for much of 2004. Euro zone growth data had also failed to excite investors, and dealers said that was one reason they were wary of dumping the dollar for the yen or euro.

The closely watched Ifo business climate index for Germany, Europe's largest economy, fell sharply in February, defying expectations for a slight increase, data showed on Wednesday.

The Canadian dollar fell further after tumbling over one percent on Wednesday in its biggest fall in 10 months.

That came after Canada's federal government presented a budget that scrapped a 30 percent limit on foreign investments in retirement savings accounts -- a move that analysts say could lead to large capital outflows, further depressing the currency.

The Canadian currency traded at C$1.2455 per dollar, after hitting a fresh 2-week low near 1.2500.


EURO/DOLLAR: The euro recorded a fresh six-week high of $1.3273 Wednesday but remained below $1.3260/50 resistance most of the time. A key support today is sitting between $1.3190-1.3170 and above this region a fresh leg higher to $1.3300/10 and more to $1.3390 is in the offing. A failure to break $1.3273 on an initial attempt would suggest that we are in the midst of a consolidation phase, and in that case expected range would be $1.3273-1.3170 band. There are mild signs of overbought conditions appearing on daily charts; however, weekly charts are still showing additional upside potential. The pair is trading inside an ascending channel formation on dailies, challenging upper barrier at $1.3340 and lower border is at $1.3130.


STERLING/DOLLAR: Cable is trading above a critical rising trend line containing on the downside at 1.9040, and above this support extension of the rally towards 1.9160 and more to 1.9200 is on the cards. A pennant like consolidation pattern is in the working on intraday charts impeding on the upside at 1.9135 and providing a solid base around 1.9040. Initially, we are going to witness coiling price action between this range until we break the upper resistance in order to extend the rally towards 1.9160-1.9200. A decisive move above 1.9200 would accelerate the upside thrust challenging 1.9290-1.9330 resistance. On the other hand, a swift push below 1.9040 would test 1.8970 floor.


@13h30 GMT: US. January Durable Goods Orders and Weekly Jobless Claims


FOMC meeting reported that the target rate was too low for stable prices, and see an inflation risk if the dollar and productivity fall.


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