NEW YORK, Oct 19: The dollar held firm on the foreign exchange market on Friday, amid a cautious outlook for the yen and little enthusiasm for the euro.

The euro, which has neared one-month lows against the US unit, ended up slightly at $0.9717 against 0.9708 late on Thursday in New York.

The dollar rose to 125.48 yen against 125.06 on Thursday, levels not seen in around four months.

Bank of America economist Callum Henderson said the US unit was being buttressed by investors buying US stocks, spurred on by results from the likes of software behemoth Microsoft which cheered the market.

What we’ve seen in last 48 hours is hedge funds which were short of equities and to some extent long on bonds have started to cut back on those positions, he said.

As of Tuesday night we upped our weighting in equities to 70 per cent from 65 and we cut bonds to 20 from 25 and I believe some other houses did similarly this week, he said.

Dealers were also digesting the fallout from comments by European Commission President Romano Prodi denouncing the EU Stability and Growth Pact as “stupid” and “rigid.”

Analysts at ABN Amro wrote that the comments had helped undermine sentiment on the euro.

The market was also cautious ahead of the Irish referendum on the EU enlargement treaty at the weekend amid concern voters might reject the plans for a second time.

Robert Sinche of Citibank said the dollar appears to be stabilizing after losses earlier this year, but that the outlook for the yen and euro are less favorable.

Generalized yen weakness continues to be our major theme for the second half of 2002. Increasing signs of cyclical weakness should push the yen weaker during the months ahead, particularly if the Bank of Japan eases, Sinche said.

The outlook for the euro appears to be deteriorating. Restrictive fiscal policy suggest increasing pressure on the European Central Bank to ease policy should erode interest rate support for the euro while uncertainty about the euro area policy regime creates uncertainty about long-term returns.

However, the dollar pulled back in late trade as investors locked in profits ahead of the market.

Dealers said new remarks by Boston Fed chief Cathy Minehan also weighed on late session sentiment.

Minehan said the US economy remains in a fragile state, with consumer spending now showing signs of weakness, and the Federal Reserve will need to focus on supporting the shaky economy.

The dollar was being quoted in late trade at 1.5117 Swiss francs after 1.5118. The pound was at 1.5454 dollars from 1.5499 late on Thursday. —AFP