FX IN EUROPE-Dollar bears undaunted by euro easing:
By Swaha Pattanaik
LONDON, Dec 3 (Reuters) - European interest rate cuts threw the dollar a lifeline on Thursday but failed to hoist it out of harm's way amid persistent concern about U.S. stocks.
Rate cuts in the 11 countries which will adopt the single European currency have come sooner than traders were expecting but only temporarily eclipsed worries that falls in U.S. stocks will whittle away at American consumer confidence and growth.
Analysts said it was therefore only a matter of time before the dollar sank back towards the two-week lows it has already plumbed against the mark.
''These rate cuts may have been a suprise in terms of the time but they do not change anything and the overall bias for dollar/mark is still down,'' said Jesper Dannesboe, treasury economist at ABN Amro in London.
The dollar rebounded as far as 1.6831 marks after the European rate cuts from session lows of 1.6625. However, by 1618 GMT, it had fallen back to 1.6735/40.
More weakness could also be on the cards against the yen if speculation persists that European central banks are boosting the amount of Japanese currency they hold in their foreign exchange reserves before the launch of the euro.
Talk that European central banks have been buying yen for marks and Ecus in the past day or two depressed the dollar to one-month lows of 117.58 yen and forced the mark down as much as two percent to troughs near 70.50 yen.
Analysts were sceptical about whether such diversification was already underway and said the yen's gains could prove fleeting.
''A diversifying of reserves is possible as a long-running issue but it's difficult to see it happening as a near-term process,'' said Larry Hatheway, global head of strategy at Warburg Dillon Read in London.
A renewed focus on economic fundamentals is likely to leave the yen vulnerable given the weakness of the Japanese economy, which suffered an unprecedented fourth consecutive quarter of contraction, according to data released overnight.
However, it will take a significantly stronger-than-expected U.S. jobs report on Friday to convince traders of the wisdom of betting aggressively on a stronger dollar/mark, analysts said.
''Today's rate cuts gave the dollar temporary support but the focus will now be on the U.S. payroll numbers on Friday which could shift rate-cut speculation to the U.S.,'' said Nick Stamenkovic, economist at Bank Austria Creditanstalt Futures.
Speculation of lower U.S. rates are also likely to mount if Latin American markets fall victim to concern that a setback to the Brazilian government's fiscal austerity plan will jeopardise its chances of winning international loans.
Talk of more U.S. rate cuts will leave the dollar particularly vulnerable against the mark, and its successor the euro, given that the European Central Bank is now under no pressure to cut rates.
''The rate moves have taken the pressure off the ECB to do anything and it can now start with a clean slate as speculation of a rate cut will drop out,'' said Stamenkovic at BACA Futures.
This view was reinforced after Bundesbank President Hans Tietmeyer said the rate cuts reflected economic conditions and ensured that the ECB would not be dogged by speculation about rate moves at the outset of EMU.
Another currency which is expected to suffer against the mark on the basis of interest rate expectations is sterling.
Speculation the Bank of England Monetary Policy Committee will cut rates at next week's meeting grew as a result of today's easings in continental Europe, particularly as the domestic case for a rate cut is already strong, analysts said.
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