US dollar's decline accelerates

Euro

The European single unit commenced the week on a strong footing as it continued to draw support from broad-based weakness in the dollar, which remained under intense pressure due to geopolitical risks in Iraq and North Korea as well as renewed concerns over the health of U.S. economy.

The dollar was depressed as United States doubled its troops in the Gulf region and North Korea formally abandoned the nuclear non-proliferation Treaty. Washington softened its tone on Monday and said it was willing to consider helping North Korea with its energy crisis if the current stand off over the isolated nation's nuclear plans could be resolved, however the news had little impact on the dollar's position.

The greenback got a hit after the vehicle sales accounted for the 1.2 percent rise in overall U.S. retail sales for December, however the core items excluding autos and parts were unchanged, confirming retailers predictions of the most disappointing holiday shopping season. Constructive Euro zone data provided additional support for the single currency.

Euro zone's largest economy, Germany released surprisingly good production data, with industrial output showing a monthly rise of 2.5 percent in November, beating analysts' expectations of a 0.6 percent increase. French companies increased output in November propelling industrial production 1.2 percent higher. The rise was three times more than a consensus forecast for a 0.4 percent increase. The data bolstered speculation that the Euro zone's two largest economies could be gathering momentum and escaping recession.

Intel Corp's announcement that it will slash capital spending this year despite reporting better-than-expected fourth-quarter earnings had a negative effect on the greenback. Manufacturing growth in New York State accelerated for a third straight month in January, however it did not support the dollar. December producer price underscored pricing problems facing U.S. manufacturers.

Wholesale prices were flat in December but fell 0.3 percent excluding the volatile food and energy sectors, largely due to falling vehicle prices. The Federal Reserve's 'beige book' report said the current 'soft patch' in the U.S. economy extended into early January, confirming the widespread notion that the pace of economic recovery is sluggish.

Meanwhile the market was unimpressed after Philadelphia Fed said its index of business conditions was little changed at 11.2 in January compared with an upwardly revised 11.3 in December.


Despite of all the data released markets continued to be driven by developments on the U.S - Iraq tensions. The dollar remained in troubled waters after U.N weapons inspectors found empty warheads designed to carry chemical agents. Hans Blix Chief U.N weapon inspector said he would tell Iraq the situation was 'very tense and very dangerous' and only fuller co-operation with his team could avert war. The discovery raised the likelihood of military action against Iraq.

On the last trading day broad dollar dumping led Euro to touch a new three-year high of $1.0680 versus the dollar. U.S Secretary of State Colin Powell was quoted as saying there would be a 'persuasive case' by the end of January that Iraq was not co-operating with weapons inspectors.

Tensions over Iraq have hurt the dollar as investors seek the relative safe haven of the other currencies. Another round of bad economic figures added to the gloomy outlook of the U.S. economy. Trade data showed the nation's trade gap widening to a record $40.1 billion in December. A wider trade gap pressures the dollar by boosting the amount of capital inflows required to fund a growing current account deficit.

The greenback took another hit when the government reported that industrial production fell 0.2 percent in December while capacity utilisation fell to 75.4 percent from 75.6 percent the prior month. The last blast to the dollar was the University of Michigan's preliminary consumer sentiment survey for January. The index, which was forecast to stay flat, fell to 83.7 from 86.7 in December.

Range for the week: $1.0420 - $1.0920

Japanese Yen

The Japanese yen started the week with Tokyo closed for a holiday. The greenback lacked clear direction against the yen due to wariness that Japanese authorities might intervene to weaken the yen.

Zembei Mizoguchi, who succeeded Haruhiko Kuroda as the Finance Ministry's Vice Minister for international affairs repeated that yen's excessive strength, was not good for Japan's economy and officials were on alert. Mizoguchi said that recovery prospects for the U.S. economy were still stronger than Japan. Traders are increasingly wary that Japanese authorities might spring into action to counter the yen's export-damaging gains against the dollar.

Midweek the dollar fell to four-months lows of 117.55 versus the yen. The U.S. unit was already under pressure when weak retail sales data gave traders another reason to sell it. The yen gained, as the market appeared to be testing Japanese authorities' intention to keep it capped to protect exports and the persistently weak economy.

The absence of any sign of yen-selling intervention by the Bank of Japan below 118 yen encouraged dollar sellers. Later in the day dollar moved as high as 118.82 against the yen. The move prompted the concern that the Bank of Japan might be in the market selling yen.

The greenback quickly returned those gains, and it became clear that the spike was due to a big order or two. A Finance Ministry official declined to comment on the move, which the market interpreted as meaning authorities had not intervened.

At the end of the week, the yen shot up to a fresh four-month high of 117.40 against the dollar on poor U.S. economic data and concerns about possible military conflict in Iraq. The Japanese government downgraded its assessment of the economy for a third straight month, citing deteriorating output and sluggish personal consumption.

However it upgraded its view on exports, which have recently been resilient after a few months of slowdown that led to the output decline. Meanwhile investors grew nervous that Japanese authorities may take advantage of thin trading volumes ahead of Monday's U.S. Martin Luther King Day holiday to conduct yen-selling intervention.

Range for the week: 115.25 - 120.25

Sterling

Sterling commenced the week on a soft tone against the dollar. Data showed the cost of raw materials in Britain rose at its fastest pace in more that two years in December due to surge in oil prices.

Factory gate prices rose only 0.1 percent on the month, showing that beleaguered manufacturers still seem unable to pass on rising costs. News that Prime Minister Tony Blair said it would be wrong to put an arbitrary time scale on the work of U.S. weapons inspectors but insisted Iraqi President would be disarmed by force if necessary, had little impact on the pound.

Midweek, sterling rebounded from the grip of downtrend from $1.5960 to a high of $1.6084 after November manufacturing unexpectedly rose for the first time in four months. November's manufacturing production rose by 0.4 percent from October after falling 0.6 percent in the previous month.

U.K employment data failed to push sterling higher against the dollar. Unemployment remained steady at 3.1 percent but with continued falls in manufacturing jobs. Sterling's gains were capped by renewed selling from Japanese investors, who were snapping up the yen via the pound.

End of the week troubles in dollar due to tension in Iraq and list of unimpressive economic data from U.S. pushed the pound to a high of $1.6198, its highest level in three years.

Range for the week: $1.5880 - $1.6380