US dollar recovers some ground (page 1 of 3)

Economic data released in the US revealed a gloomy picture, while in the UK data spelt doom for Sterling, which looked lost for most part of the week. The euro struggled, but managed to put up a brave display as markets await the release of the German Ifo business sentiment index, that is likely to decide the currency's fate during the coming week.

Euro

The euro commenced the week on a fragile note under pressure from the previous week's dollar onslaught, due to receding fears of a U.S. led attack on Iraq. The euro traded as low as 1.0678 before stabilising at 1.0700 levels helped by a cloudy but promising outlook from the ECB President Wim Duisenberg in his testimony to the Economic and Monetary Affairs Committee of the European Parliament.

Duisenberg, who said the euro's current levels reflected economic fundamentals, also added that the threat of war with Iraq was dampening the economic prospects of the euro zone. Volumes in the FX markets remained thin at the start of the week due to a holiday in New York and traders were left direction-less due to the increasing opposition to the United States campaign to disarm Iraq.

As the week progressed, the euro came across renewed pressure after investors rushed and bought yen at a torrid pace in what analysts attributed to repatriation flows and a diminished chance of intervention by Japanese authorities.

Meanwhile, Germany's ZEW Institute said that its economic expectations indicator rose by 1 point to +15 in February providing some solace for the wounded euro although the think tank later said that growth in the euro zone's largest economy would remain weak during the second half of this year.

German Finance Minister Hans Eichel played down the idea of a deepening economic crisis but said that Germany would almost certainly be unable to keep its budget deficit below the EU's 3 percent of GDP target, if growth fell below 1 percent in 2003. He also added that if a war with Iraq should occur, exceptions could be made to EU budget rules - - the stability and growth pact - - put in place to support the euro currency.

Elsewhere, data showing euro zone industrial output slumped by 1.5 percent in December 2002, its sharpest drop on record also cast a shadow over the euro although a poor number had already been priced in.

Midweek, news that the US and Britain would introduce a new resolution seeking authorisation for war against Iraq and continued repatriation flows into Japan took some shine off the dollar allowing the euro to tread on stable ground above key chart support at 1.07.

Although the market witnessed an unexpected rise of 0.2 percent in US January housing starts, the dollar's fortunes were decided by fluctuations in the US-Iraqi standouts. As the dollar remained to be driven by geo-political issues, US Defence Secretary Donald Rumsfeld declared that the military build up in the Gulf region had reached a point where US and British forces stood ready to invade if the order was given.

Also adding to the dollar's problems were a set of weaker than expected economic data which reminded investors that the US economy was not out of danger yet. Data showing a record trade deficit, unexpectedly high inflation and a weak labour market, pulled the dollar lower as markets refocused their attention on economic fundamentals.

The US government report said that January wholesale prices soared at the fastest pace in over a decade while the current account deficit sky rocketed to a record 44 billion in December 2002 versus estimates of a rise to 38 billion taking the annual figure to $ 435 billion.