Dollar steadies in London

The dollar was mostly flat against major currencies on Thursday as dealers digested interest rate decisions in Europe and keenly awaited a steer from European Central Bank President Jean-Claude Trichet.
The European Central Bank and Bank of England left rates steady at 4.25 percent and 5 percent, respectively, decisions that came as little surprise to market participants although a reasonable minority had positioned for a BoE cut.
The focus for investors now is very much on Trichet's press conference at 1230 GMT. They will be looking for clues on how the confluence of slowing growth, above-target inflation, sliding commodity prices and a falling euro will influence policy in the coming months. The ECB is expected to issue a new set of economic projections while rejigging collateral rules.
Analysts expect Trichet will hold fast to his long-held position that inflation risks will keep high the need for tight policy, even as he acknowledges that the eurozone economy is slowing. "We don't expect Trichet to sound dovish despite the (recent) falling oil price and declining inflation across Europe. So the net impact will be positive for the euro," said Roberto Mialich, currency strategist at Unicredit in Milan.
"The risk is for mild short covering for the euro, unless Trichet sounds extremely dovish. The market is still euro negative ... but for the time being we should see some consolidation," particularly ahead of Friday's August US employment report. At 1210 GMT the euro was largely steady on the day against the dollar at $1.4475, pulling back up from $1.4384 hit the previous day for the first time since January.
The dollar was flat against the yen at 108.35 yen. The dollar index was also little changed on the day at 78.11, in part kept in check by a 0.4 percent rise in oil prices, which were recovering from a roughly 9 percent fall so far this week. Sterling rose 0.4 percent to $1.7820, benefiting from a 'relief rally' after the BoE decision.
The euro was down 0.5 percent at 81.23 pence. Along with the forecasts on growth and inflation, investors eyed changes to collateral rules as the ECB appears set to put a stop to banks exploiting current rules on swapping complex, untraded and near impossible-to-value assets for ECB funds.
Traders said the biggest risk facing the euro heading into Trichet's press conference was the possibility that he may appear more cautious on the outlook for the eurozone economy, which could underscore expectations for an eventual rate cut. Much of the dollar's ferocious gains in the past month have been driven by the view that weakness in the US economy, which had dogged the currency, was bound to have a negative impact on the state of the global economy, including the eurozone and the UK.
But some analysts argued that the ECB Governing Council would emphasise that it will stick to its inflation-fighting mandate, and that price risks remain high despite a slip in consumer prices, which may further postpone a rate cut. "It may be that a dip in July CPI and lower oil prices suggest inflation has peaked," analysts at Calyon wrote in a research note.
"But recent rhetoric from other Governing Council members has surprised on the hawkish side and with the bank still concerned about the threat posed by a wage-price spiral it is difficult to envisage Trichet diverging from this tone today." Figures derived from Eonia rates indicate the market does not anticipate a rate cut until at least the middle of 2009, despite signs of a slowing economy.
Central bank rate decisions were the theme of the day, with Sweden's Riksbank raising rates by 25 basis points to 4.75 percent in a widely expected move. But it also forecast that borrowing costs will fall in the future, which put the Swedish crown under selling pressure. The euro was flat against the Swedish crown at 9.4823 crowns, having recovered from an earlier, initial slide after the Riksbank announcement.