Sterling takes a beating

Euro

The dollar commenced the week on a firm note after the weekend meeting between the Group of Seven (G7) finance ministers and central bankers gave no surprising remarks about currency movements, but said they would co-operate closely on forex.

The single currency came under broad-based pressure after the European Central Bank indicated it could trim interest rates in the next few weeks. ECB President Wim Duisenberg, speaking on the sidelines of a G7 meeting in Paris said the bank's hoped for economic recovery later this year was no longer certain.

Duisenberg also said the central bank's hands would not be tied by a possible Iraq war, which was interpreted as a clear signal that the ECB could cut interest rates in the near term. The ECB's key rate is currently 2.75 pct and will next be reviewed at the ECB policy meeting on March 6.

Meanwhile, news regarding a potential war on Iraq continued to weigh on the dollar. Fears of war simmered after the United States and Britain circulated a draft United Nations resolution that declared Baghdad had failed to take advantage of its final opportunity to disarm peacefully.

France and Germany came out strongly against the draft and most other members of the U.N. Security Council at this stage oppose a swift move to war. The euro rose broadly testing $1.0800 levels after Chief U.S. weapons inspector Hans Blix said he saw no shift in Iraq's co-operation in disarming, raising fears the U.S. could further insist on an armed confrontation.

The dollar survived a short-lived setback on news that U.S. consumer sentiment dipped in February. Consumer confidence as reported by the Conference Board, fell sharply and unexpectedly to the lowest level in nearly 10 years. The reading of 64.0 was nearly 15 points lower than January's levels and well below economists' expectations of 76.8.

The dismal judgement was in sharp contrast to a better-than-expected reading on Germany's business climate, as measured by the closely watched Ifo index. The index rose to 88.9 in February from 87.4 in January, way ahead of expectations and its highest level in seven months. However, an unexpectedly large rise in U.S. durable goods orders, which surged 3.3 percent in January helped the greenback recover ground against the euro.

Towards the later part of the week, the dollar also got a temporary boost from a Commerce Department report which said the U.S. economy grew by 1.4 percent in the fourth quarter from an initial reading of 0.7 pct.

On the geopolitical front, news that Iraq was willing to destroy missiles determined to be in violation of United Nations rules, helped the dollar to gain momentum against the euro, which slipped 0.34 pct to $1.0745 per dollar. Iraq said missile destruction could begin on Saturday, but both the United States and Britain said Baghdad was stalling in order to avert war.

In the coming week, the ECB holds its policy meeting on Thursday and markets are divided on the chances of a 25 or 50 basis point cut in the key-refinancing rate. US employment data regarded as the most important economic indicator for financial markets is due on Friday.

Range for the week: $ 1.0600 - $1.1100

Japanese Yen

Japan's nomination of a new central bank head sent the yen to a one month high against the dollar, as traders speculated the new chief would not adopt policies that will lead to a weaker yen. After weeks of speculation, Toshihiko Fukui, was nominated to replace outgoing Masaru Hayami.

Fukui's appointment was seen as positive for the yen in light of his perceived reluctance to take unorthodox monetary easing measures, such as inflation targeting and purchase of foreign assets.

The dollar was also exposed to further selling as worries mounted about possible war in Iraq, but concerns about Japanese intervention continued to provide the U.S. unit some cushion. Zembei Mizoguchi, Japan's top financial diplomat said recent movements in the market had been rapid and inappropriate, and the ministry was watching the market closely.

Market sources said that Japan had conducted secret intervention midweek, though the dollar/yen rate showed no reaction to that disclosure.

On the last trading day, Japanese authorities confessed to the open secret of selling yen to stop the currency from rising, and their admission was rewarded as the yen fell to 118.27 levels against the dollar. In its monthly report, the Bank of Japan revealed that it had sold 513 bln yen ($4.36 bln) in the currency market to control the Japanese unit's stubborn strength.

In the coming week, Bank of Japan holds its last regular policy meeting under outgoing Governor Masaru Hayami on Wednesday and is expected to keep its current monetary easing stance intact. The Japanese yen is likely to trade on a soft note with fears of intervention helping to keep the dollar above the 117.00 levels.

Range for the week: 117.00 -122.00.

Sterling

Sterling took a beating and fell to its lowest level against the dollar since December last year following bearish comments from the Bank of England's top economist Charles Bean that Britain's current account gap may require a further drop in the exchange rate.

BOE Governor Sir Edward George also said that it was hard to know how much further the pound might sink. Sterling fell to $1.5730 levels following the comments. The pound which hit a four-year low on euro and a two-month trough on the dollar, was further hurt by gloomy UK consumer confidence data and comments by a monetary policy committee member that British interest rates could fall further.

Martin Hamdlin GfK barometer showed British consumer confidence fell in February to its lowest level in almost five years, struck hard by the threat of war in Iraq and falling stock markets.

Next week, the BOE's policy meeting will also be in focus. Although analysts forecasts no change in the repo rate, currently at 3.75 percent, markets were caught out by last months surprise decision by the BOE to cut rates by 25 basis points.

Range for the week: $ 1.5600 - $ 1.6100.