Hedge fund's action clips the dollar

The dollar dropped 1 per cent against the euro yesterday in a move blamed largely on the actions of a US hedge fund.

The shift from $1.14 to levels within a whisker of $1.16 occurred within the space of two hours and came as a shock to analysts, who searched for the catalyst behind the decline.

Mr Aziz McMahon, foreign exchange strategist with ABN Amro in London, said the dollar had probably come under pressure when a large order from a hedge fund had heightened nerves in an already jumpy market.

"The market is very nervous in the wake of the G7 meeting last weekend but the move today caught most people by surprise."

The dollar fell last week after the G7 called for currency flexibility, which was taken by the market as urging Asian nations to allow their currencies to rise against the US currency.

As European markets closed last night, the dollar was hovering around €1.158, having opened at €1.1450 yesterday morning.

The dollar also hit a three-year low against the yen, as well as slipping 1 per cent against the Swiss franc.

Mr McMahon is not convinced that the dollar's new weakness is justified however, considering instead that it should trend higher against the euro over the next few months.

He believes the dollar is locked in a range between $1.10 and $1.20 against the euro and says movements in the currencies over coming days will be closely linked to a range of US economic releases.

Many traders in New York cited the rupture of some key technical levels - most notably the euro's aggressive surge up through resistance around $1.1535 - as a key factor that sent the dollar lower yesterday.

As commentators scrambled to identify clear reasons for the dollar's descent, speculation also focused on a consultant's report that might have exacerbated the US currency's woes.

The rumour that there was an as yet unpublished report criticising the US administration's dollar policy in the wake of the G7 meeting centred on Medley Global Advisors, a consultancy for macroeconomic topics. - (Additional reporting, Reuters)