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Thursday April 14, 2005 - 11:47:15 GMT

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Dollar rises but market puzzled by strength

The dollar climbed on Thursday due to Japanese investor demand, even as traders and investors were caught off guard by the currency's surprising strength this week after an array of poor economic news.

Dealers in Tokyo said demand for dollars by Japanese investors helped lift the currency broadly during an otherwise quiet session. The nearly 0.6 percent drop in the benchmark Nikkei stock average also weighed on the yen.

Japanese investors bought 1.03 trillion yen ($9.60 billion) of foreign bonds and stocks in the week ending April 9, according to Finance Ministry data on Thursday, as they put cash to work in the new fiscal year that started this month.

Traders have been baffled by the dollar's sharp and surprising rebounds this week after U.S. reports showing the trade deficit hitting a record $61.0 billion in February and poor retail sales in March.

"The reaction to the dollar data has been all over the place," said a dealer at a U.S. investment bank. "It's really quite confusing."

Rumors that billionaire investor Warren Buffett was buying back the dollar after having made massive bets against the U.S. currency also prompted traders to tread cautiously. Buffett wagered $21.4 billion against the dollar last year.

The market has also been torn between the dollar-positive factor of rising U.S. interest rates and the persistent negative factor of the giant current account and budget gaps, leaving currencies whipsawed by short-term speculators.

At 06h04 GMT, the euro was at $1.2875, down about 0.3 percent on the session and holding above two-month lows around $1.2800.

The dollar rose to 107.85 yen from late New York levels around 107.35. The U.S. currency also gained against sterling, the Swiss franc and the Australian dollar.

As much as anything, traders and strategists say the market is stuck in a volatile trading range, with many waiting for a clear trend to emerge before making big bets.

So far this month the dollar has traded roughly between $1.3060 and $1.2800 against the euro and between 108.90 yen and 106.75 yen.

Some analysts said the dollar's rally on the steady rise in short-term U.S. rates and the hopes for the Federal Reserve to potentially lift rates more aggressively was starting to fade.

The U.S. currency has jumped about 5 percent against the euro and the yen this year, benefiting from the interest rate advantage it has over other major currencies, luring investors to short-term dollar deposits.

The Fed has raised rates by a quarter percentage point seven times since June, bringing its funds rate to 2.75 percent. Rates in the euro zone and Japan are expected to remain stuck for a while at 2.0 percent and virtually zero respectively.

Market players were looking to U.S. capital flows figures on Friday, which are forecast to show the country attracted $65 billion in foreign capital in February.

That's down from $91.5 billion in January but above the roughly $55 billion needed each month to cover the current account deficit.


EURO/DOLLAR: The euro is sidelined but continues to weigh on the downside. This week the market has failed ahead of resistance at $1.3060/1.3140. Our focus therefore remains on major support at $1.2800/1.2715. We suspect that we may see further consolidation near term between these two zones of support and resistance, however while capped by the 100-day moving average at $1.3162, our negative bias remains.


DOLLAR/YEN: The dollar sold off to and held interim support at 107.20. This is somewhat encouraging. We were expecting to see a relatively minor retracement only and ideally the market will hold 107.20/15 and retest 108.90, the recent highs.


DOLLAR/SWISS FRANC: The rally in the dollar has yet to overcome major resistance at 1.2130/1.2265 and although we are seeing probes of these levels and pressure is on the topside, we wait for a break here to confirm further upside potential. While capped here, we cannot rule out spikes lower.

STERLING/DOLLAR: Sterling continues to stall at its 100-day moving average at $1.8992. While it remains capped here, a negative bias will persist. As a consequence this leaves attention once again on the downside. We look for a slide to initially $1.8670 and then key support at $1.8595/10.


@13h30 GMT: U.S. February Business Inventories, U.S. Weekly Jobless Claims



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