Market Research

LONDON (Dow Jones)--Watching sentiment towards the U.S. dollar turn more positive may be like watching an oil tanker turn around - slow and laborious.

Nevertheless, as events over the last few days have shown, sentiment is definitely turning and the dollar's downside risks are falling.

"The euro should trade in a $1.4650-$1.4950 range, depending on the news flow, on risk aversion and probably on the direction of equity markets," said Gavin Friend, a
senior currency strategist with Commerzbank in London.

Not only is the U.S. currency being helped by new optimism over the U.S. economy, as illustrated by the latest manufacturing survey, but also by the increased
realization that investors are being attracted by the growth promoted by the aggressive rate cuts in the U.S. rather than the higher yields being offered elsewhere.

Pointing to the dollar's reaction to Friday's highly disappointing fall in U.S. non-farm payrolls, Simon Derrick, a senior currency strategist with Bank of New York
Mellon in London, notes that the dollar "rose on the back of a report that would previously have served to undermine it (on the basis of interest rate differentials)."

This, he added, "highlighted the shift in preference for growth-orientated policies that occurred around the turn of the year."

Although the dollar remains close to its record low against the euro and not far from its recent low against the yen, it has gradually appeared more immune to bad
economic news.

Apart from the surprise 17,000 decline in U.S. non-farm payrolls, instead of the 75,000 increase the market had been expecting, the market also had to contend with last
week's 50 basis-point cut in U.S. interest, coming swiftly on the heel of a 75 basis-point reduction the week before.

Instead of falling on both of these events, the dollar appeared to hone in more on a report from the Institute for Supply Management showing that manufacturing activity
had proved much stronger than expected last month - fed by external demand for U.S. exports as well as the recent weakness in the dollar.

Some analysts warned that the data is more the exception than the rule, given the continued slide in the U.S. economy. However, with the U.S. Federal Reserve showing
that it will respond quickly, weak data may no longer discourage investors.

"In terms of pro-active central banks, the Fed clearly leads the way and, although acknowledging the possible upside risks to U.S. inflation, the committee's latest
policy statement was one that made clear that it will do what it takes to shore up growth in the U.S. economy," Bank of New York's Derrick said.

However, relatively subdued inflation pressures have helped to give the Fed room for maneuver.

Lena Komileva, group G7 market economist with international broker Tullett Prebon, notes that a breakdown of the ISM survey suggests that the future remains gloomy with
new orders and inventory balances remaining in contraction.

However, labor markets have also weakened with manufacturing employment shrinking for the third consecutive month, she said. Weak labor markets generally help to ensure
lower inflationary pressures and less need for the Fed to worry about cutting rates.

Confidence that the Fed is pursuing the appropriate policy to help the U.S. economy is also evident in the stronger performance by U.S. equities.

Some of this also has come from reports that eight banks are putting together a package to rescue two major U.S. monoline bond insurers - helping to remove a threat
that a downgrade of these insurers could force a new round of hefty writedowns among major U.S. banks.

Confidence that the U.S. economy - and so the global economy - may not be facing meltdown was also illustrated in Microsoft's bid for Yahoo as well as reports that
aluminum-producer Chinalco has taken a large blocking stake in Rio Tinto.

In the meantime, the dollar could find additional support later this week if the European Central Bank remains as hawkish as expected after its latest meeting Thursday
- proving that it is unwilling to start cutting rates at this stage, much less pursue an aggressive easing policy like the Fed.

In the U.K., meanwhile, the Bank of England will more than likely cut its main lending rate by 25 basis points later this week in response to slow growth data. However,
with economic figures still showing U.K. inflation on the rise, the U.K. central bank is unlikely to do anything like match the Fed's recent 125-points of rate cuts.

Early Tuesday the U.S. dollar is slightly firmer on the back of weaker global equity markets.

However, the greenback is lower versus the Australian dollar after the Reserve Bank hiked interest rates by 25 basis points to 7% and maintained a tightening bias.

The Australian dollar hit a near 2-month high of $0.9099 Monday and currently fetches $0.9085.

Elsewhere the euro is trading at $1.4790, down from $1.4830 late Monday in New York while the greenback is worth Y107.08 from Y106.68, CHF1.0937 from CHF1.0880 and the
pound fetches $1.9720, down from $1.9744 late New York levels Monday.