Trading stays range bound

Euro

The euro began the week largely untroubled by the German election where Chancellor Gerhard Schroeder's Social Democrat-Green coalition narrowly saw off conservative challenger Edmund Stoiber.

Financial markets had been hoping for a clear-cut election result either way, and following the close result Stoiber predicted Schroeder's new coalition government would not last a year. Markets seemed relieved that the results were better than the worse case scenario of a hung parliament.

On the following day, the single currency remained underpinned against the greenback as investors focused on rising tensions in the Middle East and the FOMC decision on U.S. interest rates. In line with expectations, the FOMC announced an unchanged Fed Funds rate of 1.75 pct, a four-decade low. However, the decision came with an unusual dissent among the 12 voters on the policy board, two of whom voted for a rate cut.

Market players felt the move increased the chances of a rate cut at the Fed's next policy-setting meeting in November. The dollar lost ground across the board, weakened by more stock carnage on Wall Street and anxiety about potential war in Iraq.

Earlier, the dollar did get mild support from a report showing U.S. consumer confidence in September fell less than expected, coming in at 93.3. While the data suggested the consumer-driven recovery may be losing steam, the fall from August's revised reading of 94.5 was less than analysts' forecasts for a drop to 92.3.

Meanwhile, the European Commission bowed to economic and political pressure by allowing two extra years to euro zone member countries for balancing their budgets, while also allowing more time for stimulating growth. The announcement takes pressure off the European Central Bank to cut rates, analysts stated.

Euro/dollar continued to struggle in well-defined ranges as the week progressed with little by the way of data to lure investors to the single currency. The euro showed little reaction to news Germany's main business confidence indicator fell, as expected, for the fourth consecutive month. The Ifo index fell to 88.2 in September from 88.8 in August.

The last trading day of the week witnessed a plethora of U.S. economic data and resulted in the greenback firming slightly as the data exceeded market expectations and confirmed the view that the U.S. economy was recovering slowly. The U.S. Commerce Department revised up its third estimate of GDP to an annual rate of 1.3 percent in the second quarter.

The University of Michigan's final U.S. Consumer Sentiment Index for September fell to 86.1 from 87.6 in the previous month. The report signalled that the consumer led U.S. recovery from recession may be at risk. However, analysts remarked that the currency markets were well positioned for a global slow growth environment.

Signs of sluggishness in the eurozone were highlighted by comments from Ernst Welteke, ECB Board member who warned about recovery risks in Germany, the eurozone's biggest economy and hinted that policy action was possible.

In the coming week, markets will look towards comments from the G-7 for further clues on currency directions.

Range for the week: $ 0.9600 - 1.000.


Japanese Yen

Conflicting signals about the government's plans to bail out banks saddled with bad loans resulted in the Japanese yen falling versus the dollar. Hurt by mounting pessimism that Japan's economic stimulus plan is ill conceived and stalling, the Japanese currency was hammered to a low of 124.40.

Around mid-week signs that Japan's government may be ready to take long overdue steps to dispose off banks' mountains of non-performing loans lifted some of the deep pessimism about Japan. Talk that Financial services Minister Hakuo Yanagisawa , seen as an obstacle to bank sector reform, may resign, gave an additional boost to the faltering Japanese currency.

While Yanagisawa denied the rumours, the BOJ's decision to buy shares from commercial banks, a controversial effort to prevent financial crisis, put the government under pressure.

Uncertainty over whether the much-debated steps would lift the Japanese economy and reverse deep routed deflationary pressures continued to weigh on the yen. Economic data from Japan have also been particularly dismal, with unemployment near a post war record, households spending less and deflation deepening.

The magnitude of Japan's economic woes were brought to the forefront by remarks from credit rating agency, Fitch, which indicated that offloading Japan's banks' bad loans would require 40 - 50 trillion yen or around 10 percent of GDP.

Comments emanating from the G-7 meeting and a cabinet reshuffle by Prime Minister Koizumi on Monday will dominate the minds of currency traders in the coming week. Expectations that the world's top economic powers would try to soothe concerns that higher oil prices might derail a fragile global recovery and focus on Japan will interest amongst market participants.

Range for the week: 120 - 125 yen.


Sterling

Pound remained mostly range bound and tracked movement in the euro dollar in the absence of any significant data. Sentiment for the pound brightened on evidence that the U.K. economy was performing relatively well.

Economic data showed buoyant consumer spending had pushed the British economy ahead in the second quarter of 2002. The economy grew by 0.6 percent in the second quarter sharply up from 0.1 percent in the second quarter. This data made up for an unprecedented sixth successive quarterly fall in manufacturing output.

The lowest interest rates in 38 years coupled with record low unemployment appear to have encouraged Britons to go on a borrowing binge. Consistent shopping trends in the last three years have managed to insulate the U.K. economy from the worst of the global slowdown. Reflecting this overall strength, the pound, recorded a two-month peak on a trader-weighted basis of 107.1.

Range for the week: $ 1.5350 - $ 1.5850.