Market awaits Bush economic stimulus package

The precious metal Gold and the safe haven currency Swiss franc benefited the most and reached multi-year highs amid broad-based buying by risk-averse investors looking for a hedge against uncertainty. US President George W. Bush is likely to steal the limelight in the week ahead as he unveils an economic stimulus package aimed at boosting jobs' growth and investor confidence in the US.

Euro

The Euro commenced the week on an upbeat mood as it continued to draw support from broad-based weakness in the greenback, which remained under intense pressure due to developments in the Iraqi situation.

The dollar's troubles gathered momentum after the release of the Chicago PMI, which showed expansion but slowed down to 51.3 in December from 54.3 in November casting doubts on the pace of the recovery. The last trading day of the year witnessed further depreciation in the dollar after the Conference Board reported that its index of consumer confidence fell to 80.3 in December from 84.9 in November, well below expectations of a reading of 85.5.

The data sparked an all-too-familiar sell off in the dollar as it fell to a fresh three-year low against the euro trading just above $ 1.0500. The tumble in consumer confidence was consonant with weakness in holiday retail sales and analysts expressed concern that the figures may portend a period of slower consumption by American consumers, as businesses avoid new capital spending.

As New Year dawned the dollar remained pinned to its lows against all major currencies, grappling with bearish sentiment driven by concerns over a looming attack on Iraq and bumpy economic growth. The dollar was given a bold resurrection by surprisingly strong US manufacturing data, which reported its first significant expansion since August 2002.

The Institute of Supply Management's index for December came in at 54.7, well above the 50.3 analysts had expected and November's reading of 49.2. The data created optimism and provided an excuse to buy back cheaper dollars after the withering losses suffered last month amid disappointment at the sluggish pace of economic growth in the United States.

Meanwhile, an equivalent survey of manufacturing activity in the euro zone showed that the sector shrank for the fourth consecutive month in December as bosses cut jobs and output slowed.

The Reuters euro zone PMI fell more than expected to 48.4 in December, marking the steepest deterioration in business conditions in the region for almost a year. As the week drew to a close, the euro managed to regain its footing after the United States stepped up its war rhetoric and announced the deployment of additional troops to the Gulf, increasing the 60,000 strong contingent already in place.

Next week, financial markets are likely to be dominated by the unveiling of an economic stimulus package in the United States and the release of US December jobs data, expected to show unemployment unchanged at 6.0 pct. Meanwhile the European Central Bank is expected to leave interest rates unchanged as it holds its first meeting of the New Year in the week ahead.

Range for the week: $ 1.0160 - $1.0660

Japanese Yen

The Japanese yen retained a firm tone at the start of the week as it benefited from bearish dollar sentiment due to the on-going political turmoil over the situation in Iraq.

Whilst traders in Tokyo prepared for the long holiday ahead the greenback lost further ground against the yen, following the release of lower-than-expected US consumer confidence which confirmed the fragile state of the US economic recovery. Japan remained closed from December 31 until January 3, but continuing dollar weakness helped the yen climb to 118.25 per dollar, its highest level since September 10.

The move rekindled remarks from the Japanese Finance Ministry, which warned earlier that they would watch currency moves closely over the year-end period and take action if necessary.

Meanwhile, as the spotlight shifted temporarily from war concerns to an unexpectedly strong US manufacturing report the yen retreated towards 120 levels, easing speculation of intervention and letting Japanese exporters exchange dollars for yen.

The naming of a successor to Bank of Japan governor Masaru Hayami will take centre stage next week, as Japanese Prime Minister Koizumi has said that he wants someone from the private sector, with an aggressive stance on fighting deflation to replace Hayami, whose term expires in March.

Range for the week: 117.50 -122.50

Sterling

The British pound maintained a firm stance versus the dollar at the start of the week as rising tensions on Iraq and North Korea kept the greenback under pressure.

Whilst global tensions continued to haunt the dollar and remained the prime focus in holiday-thinned trading Sterling closed the year near a three-year peak at $ 1.6120 levels. As trading resumed following the New Year's day holiday Sterling held steady against the dollar after a key manufacturing report showed that the sector contracted in December.

The Chartered Institute of Purchasing and Supply's monthly index fell to 49.5 in December, the lowest reading since July, suggesting that Britain's fledgling manufacturing recovery may be faltering. Further data showed that the housing boom in the UK continued through December as Nationwide reported that house prices grew 1.7 pct in December for a gain of 25.3 pct year-on-year.

Meanwhile, Prime Minister Tony Blair stated that the euro dilemma was the biggest challenge facing the current generation even as an internet survey showed that the majority of Britons still oppose joining the euro. Sterling ended the week on a strong note after shrugging off comments from the Bank of England that there was no need for a change in interest rates.

The Bank of England, which has kept its base rate unchanged at 4.0 for over a year, is expected to return a no-change verdict at this weeks' meeting.

Range for the week: $ 1.5780 - $ 1.6280.