US dollar buyers return on war optimism

Euro

The euro started the week trading near four-year highs of $1.1067, as the dollar continued to suffer from the effects of last week's U.S. employment report, which showed a much bigger-than-expected decline in the number of jobs.

Moreover, fears of U.S.-led war on Iraq continued to paint a bleak picture on the financial market over the week. The economic impact of waging war with limited financial support from a smaller coalition of nations would exacerbate the weakness of the U.S. economy, the U.S. stock market and the U.S. unit.

The United States and Britain were trying to press for the support of uncommitted members of the U.N. Security Council for a new resolution that will pave the way for a military strike to disarm Iraq.

Meanwhile, diplomats at the U.N. said at the beginning of the week that the six undecided members of the Security Council asked for a delay on the deadline for Iraqi compliance to April 17, a month later than demanded in a U.S.-British-Spanish draft resolution. The push for a compromise came after France and Russia stated that they would veto against any resolution that authorises a military strike against Iraq.

As the week progressed, the dollar reversed its early losses after CNN reported that U.S. officials are in 'secret surrender' negotiations with key Iraqi military officials, which indicates that any war against Iraq might be swift. The report quoted that senior U.S. official said that some Iraqi military personnel might have already agreed not to fight the U.S.-led force, which will invade Iraq to disarm President Saddam Hussain.

The report also said that the communications with these Iraqi military officials are not being handled by the Pentagon but by other 'elements' within the U.S. government. CNN also reported that the U.S. won the support of Pakistan for a proposed United Nations Security Council ultimatum for Iraq's disarmament, bringing the country to within one vote of the majority needed. Angola, Cameroon and Guinea have already agreed to support the U.S.-U.K. proposal. The dollar knocked the euro below $1.08 after the news.

With the markets main focus on developments on the Iraq crisis, it had largely ignored U.S. economic data. U.S. retail sales fell unexpectedly to 1.6 pct in February from the previous month. U.S. producer prices excluding volatile food and energy costs also dropped 0.5 pct last month.

In addition, the University of Michigan's preliminary March consumer sentiment index tumbled to 75.0 from 79.9 in February.
Next week, market will keep a close eye on U.S.-Iraq crisis developments and U.S. Federal Reserve's meeting, with opinion split whether it will cut interest rates.

Range for the week: $ 1.0600 - $1.1100

Japanese Yen

At the beginning of the week, the dollar dipped its toes into the waters below 117 yen on the likelihood of war, with Washington seeking U.N. authorisation for an attack against Iraq.

Meanwhile, war threats sent the Nikkei share average to its lowest levels in 20 years below 8,000. However, the yen's rally was limited by speculation that Japan might intervene any time to curb volatility in the market. Japanese officials worry that excessive strength in the yen could hurt exports, which is seen as the main support for a faltering economic recovery.

Concerns about intervention was fuelled further by a Nihon Keizai Shimbun report that the Finance Ministry is considering massive intervention about 1.0 trillion yen a day. The step is part of measures to increase liquidity in the Japanese banking system to avert a crisis after the Nikkei fell below 8,000 levels.

Finance Minister Masajuro Shiokawa also said the government is ready to step in the market aggressively and immediately as needed. The BoJ already sold around 2 trillion yen on several occasions this year to keep the currency from strengthening.

On the last trading day, the dollar rose to 118.70 yen after talks confirmed by CNN that Iraqi officials are engaged in surrender negotiations with the Untied States. Week ahead, the market will focus on the change at the helm of the Japan's central bank.

Range for the week: 115.00 -120.00

Sterling

At the start of the week, sterling set a four-year low versus the euro and also slipped against the dollar, hit by a rising rebellion within British Prime Minister Tony Blair's government against his support for the U.S.-led attack on Iraq.

International Development Secretary Clare Short said she would resign if the country went to war with Iraq without backing of a second U.N. resolution. The announcement came after Andy Reed, a Labour member of parliament, quit his post as ministerial aide, with speculation four other could follow.

In addition, more than 120 Labour parliamentarians recently voted against the government over war with Iraq, and more are expected to sign up to the revolt if there is no support from the U.N. On the economic front, official data showed unadjusted producer output prices rose 0.3 pct in February and 1.6 pct on the year, the highest rate since January 2001.

U.K. factory production also increased to 0.3 pct in January from the previous month. The surprise rise in UK January manufacturing data pushed the pound higher to $1.6058 levels. Sterling also got a boost by comments from U.S. Defence Secretary Donald Rumsfeld, who raised possibility of Washington to go to war even without British support, which many of Blair's Labour party colleagues are reluctant to grant.

On the last trading day, the U.K. unit tumbled to $1.5823 after the news of surrender talks between U.S. and Iraqi officials. Next week, focus will be on economic releases including inflation data, jobs data and minutes of the Bank of England's latest rate-setting meeting.

Range for the week: $ 1.5700 - $ 1.6200.