Dollar Steadies Against Euro

The dollar steadied after hitting a two-week low against the euro on Monday as markets determined that a Group of Seven (searchwarning against "excess volatility" in exchange rates did not signal imminent, coordinated dollar-buying intervention.

The euro, which dipped initially after the G7 statement, later raced as high as $1.2761. Sterling offered the biggest drama, scoring an 11-year high of $1.8628.

The G7 added to its standard communique phrases about monitoring foreign exchange markets closely, saying: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth."

"I don't think people are interpreting that as raising the risk of coordinated central bank intervention to halt the dollar's slide," said Alex Beuzelin, foreign exchange analyst at Ruesch International (searchin Washington D.C.

"While the G7 statement could prompt a pause in the dollar's downward trend, it's not going to halt it," he said. "I think that's why you've seen the greenback weaken."

With the G7 risk out of the way, markets were expected to resume dollar selling on the view that the U.S. current account deficit is unsustainable and that the U.S. administration is happy to see the greenback fall to correct that imbalance and boost economic growth ahead of November's presidential elections.

Monday's U.S. economic calendar was light, so traders will turn their attention to Federal Reserve Chairman Alan Greenspan (search), who is scheduled to give his semi-annual testimony on monetary policy before the House Financial Services Committee on Wednesday.

In early U.S. trade, the euro was up 0.06 percent at $1.2712. The dollar was up 0.31 percent at 105.74 yen. Sterling rose 0.64 percent to $1.8585.

The Australian dollar was up 0.91 percent at US$0.7772.

Currency analysts said the euro still had more room to rise against the greenback, putting additional pressure on European companies to adjust to more difficult trading conditions.

Many traders viewed the G7's reference to exchange market volatility as a change of emphasis to counter the impact of the G7's call in Dubai last September for "more flexibility" in exchange rates. That statement triggered a 10 percent drop in the dollar's value against the euro, ringing alarm bells among euro zone officials.

Analysts said the shift in wording was likely a compromise between the U.S., which backs market flexibility that allows for growth-supporting dollar falls, and Europe which wants to prevent excessive market movements from hurting its own recovery.

"It was a compromise between U.S. and Europe. There appears to be a stalemate and in this condition the natural trends in euro/dollar will take over," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein (searchin London.

The G7 also narrowed its Dubai call for currency flexibility to countries "that lack such flexibility."

Traders assumed the shift was aimed at China and other Asian countries that peg their currencies to the U.S. dollar, although speculation simmered over whether Japan, which has engaged in massive dollar-buying intervention in the past year, was also under fire.