Dollar Hits Three-Month High Vs. Euro

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By Mohammed Abbas
LONDON (Reuters) - The dollar hit a three-month high versus the euro on Monday after the Federal Reserve chief signaled that structural problems in the U.S. economy may improve, while global economic powers repeated their views on currency policy.

With the risk related to the weekend Group of Seven (G7) meeting removed, investors returned to buying dollars and waited for more comments from Fed chairman Alan Greenspan on Monday and President Bush's budget proposal later in the day.

Bush is expected to reveal a cut in domestic spending in an attempt to curb ballooning deficits that have been a major factor behind the dollar's three-year slide.

"The dollar is still doing well off the back of Greenspan's comments -- you've got one of the most important policy makers around hinting at the inflection point of the trade deficit," said Trevor Dinmore, currency strategist at Deutsche Bank in London.

"Today's budget has probably already been discounted."

The dollar hit its highest levels against the euro since Nov. 5, 2004 at $1.2828 but eased off a little to trade at $1.2845 at 1115 GMT.

The dollar was also firmer against the yen, gaining 0.40 percent from closing levels in New York on Friday to trade at 104.51 yen.

The Japanese currency traded on a weak bias after fresh comments from Chinese policymakers on Monday dampened speculation of a near term yuan revaluation.

China's central bank governor Zhou Xiaochuan said that much preparation would be needed before there could be any changes to China's foreign exchange regime.

THE GREENSPAN FACTOR

Greenspan's surprisingly optimistic view on the large U.S. current account deficit helped ease persistent worries that the dollar could suffer if the U.S. economy failed to attract enough foreign cash to plug the external shortfall.
Greenspan said market forces and tighter U.S. fiscal policy should stabilize and may cut the current account deficit.
Tighter fiscal policy in Washington would also help offset worries about structural imbalances in the U.S.

However, some analysts doubted Bush's budget would have teeth, saying that even drastic domestic spending cuts would have to be endorsed by Congress against fierce Democrat opposition.

"It's quite key that a lot of the promises we have been hearing on the fiscal side do make it into the budget, that's going to be a key focus," said Ian Stannard, currency strategist at BNP Paribas.

Meanwhile during the weekend, the G7 issued a communique that including wording on currencies that was identical to a statement issued in Boca Raton, Florida, a year ago.

Policymakers reiterated their desire for more flexibility and less volatility in the foreign exchange market.

Regarding China, a key topic of speculation ahead of the closely-watched G7 meeting, not much news came out either.

Beijing officials told the G7 they were committed to revaluing its currency but gave no timetable.

Speculation in the past few months about the timing of a yuan revaluation had driven the yen higher, as the market has used the Japanese currency as a proxy for the yuan because it is the most widely traded Asian currency.

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