Dollar Firms, Oil Dips

reuters.com Thu January 30, 2003 04:19 AM ET By Nigel Stephenson

LONDON (Reuters) - The dollar firmed, European stocks rose and oil prices dipped on Thursday after Washington said it would make a last diplomatic effort to avert war with Iraq and the U.S. central bank left interest rates unchanged.

Safe-haven gold and government debt prices fell as U.S. administration officials said President Bush and his top aides were opening a final "diplomatic window" with allies to try to avoid the seemingly inevitable conflict over U.N. demands Iraq give up weapons of mass destruction.

Bush said on Tuesday that his Secretary of State Colin Powell would next week lay before the U.N. Security Council intelligence showing Iraq has been concealing weapons. Iraq denies having such weapons.

The dollar firmed after a rally on Wall Street following the U.S. Federal Reserve's widely expected decision to leave rates at a four-decade low. Fed policymakers said risks to the U.S. economy remained evenly balanced between higher prices and renewed downturn and expressed hope the U.S. economy would pick up once fears of war with Iraq have lifted.

"I think probably the steady outlook they provided was the most reassuring for the market," said Rob Hayward, senior currency strategist at ABN Amro.

"An easing bias could have been justified by data or by uncertainties, but people would have been more concerned seeing that even the Fed's worried, and wonder if they are going to cut rates again or if the economy was in a worse position than thought."

The euro was last trading around $1.0760, up more than half a percent from its New York close. The greenback hit a three-year low beyond $1.09 on Monday. The U.S. currency was up a third of a percent on the yen at 118.86 JPY= and the pound GBP= .

Some traders said short dollar positions were being unwound after Bundesbank President and European Central bank council member Ernst Welteke said the euro's rapid rise would become a problem for the euro zone economy if it continued.

"A bit of dollar fatigue is creeping in. Welteke comments prompted some re-evaluation among traders," said one trader at a London-based bank. "But it is positioning and not a change of sentiment."

TECHS LEAD EUROPEAN STOCKS HIGHER

European stocks rose, led by software group SAP SAPG.DE , which beat 2002 targets, and handset maker Nokia NOK1V.HE .

The FTSE Eurotop 300 index .FTEU3 of pan-European blue chips was up 1.4 percent at 0850 GMT while the narrower DJ Euro STOXX 50 index .STOXX50E was up 1.53 percent.

U.S. stocks closed higher after the Fed decision soothed investors' nerves jangled by Bush's tough talk on Iraq.

The Dow Jones Industrial average .DJI ended up 0.27 percent. The tech-dominated Nasdaq .IXIC closed 1.18 percent higher after Merrill Lynch raised Novellus Systems Inc NVLS.O , a maker of equipment used to produce computer chips.

However, U.S. stock index futures were slightly down in early European trade, indicating Wall Street would open lower.

Tokyo shares closed lower as institutions, spooked by the threat of war, sold blue chips. The Nikkei .N225 ended down 0.17 percent, just above a two-decade low hit last November. The broader TOPIX index .TOPX dipped 0.07 percent.

Gold, seen as a safe place for investors to put their money in times of geopolitical turmoil, fell in Europe. Spot gold XAU= , which has risen some seven percent this year, was quoted at $364. an ounce, compared with $366 at Wednesday's New York close.

Oil prices dipped on renewed hopes war could be averted by the U.S. diplomatic push. Brent crude for March delivery LCOH3 was down 17 cents at $30.85 a barrel. U.S. light crude CLc1 , which rose three percent on Wednesday on a big drop in U.S. winter heating oil stocks, was down 13 cents at $33.50 a barrel.

The threat of war in the Gulf, which supplies 40 percent of world crude exports, and a strike in Venezuela, have pushed up prices 35 percent since late November.

Safe-haven government bond prices fell. The yield on the two-year German Schatz EU2YT=RR , which moves in the opposite direction to the price, was up 2.2 basis points at 2.62 percent. It touched a 3-1/2 year low of 2.54 percent last week. The 10-year Bund EU10YT=RR was yielding 4.08 percent, up 2.0 basis points.

"The stocks won't be helping but the real story has been war and there is a realization that the panic buying that was driving the market...that reflex is waning and some of the people who had it are long and suffering," one European debt trader said.