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Monday, November 19, 2007

Forex - Dollar, euro range-bound amid light data calendar

Major currencies remained in narrow trading ranges, with a dearth of data meaning focus was on global currency imbalances and credit worries.

The dollar is hovering around a cent off its all-time low against the euro and its weakness is causing some friction within major exporters such as China.

Chinese Premier Wen Jiabao pledged today to resolve trade imbalances after the country's surplus hit a record high in October, and to work to let the yuan move more freely. A stronger yuan would make Chinese exports more expensive overseas.

Wen said China will work to "increase (the currency's) flexibility and gradually make the yuan convertible under the capital account".

However European Central Bank president Jean Claude Trichet, speaking at the meeting of central bankers in Cape Town today, refused to make any specific comments on the strong euro. Instead he reiterated previous comments that "excess volatility in currency markets is undesirable".

EU economic commissioner Joaquin Almunia made similar comments later this afternoon saying that the euro's recent moves may be brutal but fundamentals are the ultimate factor in respect to free market volatility.

"Dealers in Europe see little new in the latest rhetoric from the EU," said Matthew Foster-Smith at Thomson IFR Markets, explaining why the dollar remained stable against the euro.

Later this week, attention should switch back to fundamentals. The minutes to the US Federal Reserve Oct 31 rate decision come tomorrow and investors will be looking for any signal that borrowing rates will come down again in December, following a quarter-point cut at the Oct 31 meeting.

"With the market relatively confident about the prospects for a rate cut in December, the risk is these expectations will be disappointed somewhat, which would be positive for the dollar and negative for risky assets," said analysts at Barclays Capital.

The pound recovered slightly this afternoon after dropping this morning following more gloomy news on the UK housing market. The latest Rightmove house price survey showed the average asking price was 0.7 pct lower in November compared to October.

In the UK the main focus later this week will be on the Bank of England's minutes to its rate decision earlier this month. The central bank left rates unchanged at 5.75 pct but the subsequent, surprisingly dovish Inflation Report, along with weak housing indicators, has raised expectations for a cut in the coming months. Investors will be keen to see whether the Monetary Policy Committee was divided in its decision.

"The market will be looking at how dovish the Monetary Policy Committee board members have turned," said Alina Anishchanka, currency strategist at UBS, adding that the pound is likely to fall sharply on any hint of a December rate cut.

London 1623 GMT London 1248 GMT

US dollar

yen 110.07 down from 110.30

sfr 1.1160 down from 1.1185

Euro

usd 1.4665 up from 1.4636

yen 161.44 down from 161.47

sfr 1.6370 down from 1.6373

stg 0.7149 up from 0.7137

Sterling

usd 2.0507 up from 2.0500

yen 225.75 down from 226.13

sfr 2.2885 down from 2.2937

Australian dollar

usd 0.8863 down from 0.8900

stg 0.4321 down from 0.4341

yen 97.58 down from 98.19

rachel.armstrong@thomson.com

rar/ak

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