US dollar dives against the euro

Euro

The dollar started the week on a firm note on expectations that US stocks would carry a better trend from last week's good outcome on U.S. earnings.

Meanwhile, the main market focus returned to the global growth prospects in the wake of the war in Iraq. Foreign exchange market participants were waiting for further information on the health of the US economy from a variety of economic data due for release later in the week.

The first being the Beige Book, an anecdotal summery of US economic conditions from the Federal Reserve, followed by durable goods orders and the first estimate of first-quarter US gross domestic product.

With Japanese interest rates near zero and U.S. short-term rates at a four-decade low of 1.25 pct, the lure of euro zone government and agency debt was the chief beneficiary. The euro hovered near four-year highs of 131.50 yen, as yield-hungry Japanese investors continued to boost their euro-denominated bond holdings in the face of feeble yields offered by Japanese government bonds.

In addition, the euro jumped sharply close to $1.10 levels as investors continued to shun the dollar in favor of higher-yield currencies. Meanwhile, the single currency's advance over the dollar and the yen prodded some European officials to step up the rhetoric. A senior European Union finance official stated that the rise of the euro would start to hurt the economy at some points but also pointed out some benefits from the stronger currency.

The economic outlook in the world's biggest economy continued to dent dollar sentiment. A report showed durable goods orders rose by 2.0 pct in March, easily exceeding analysts' expectations. However, the release of U.S. GDP that expanded at 1.6 pct in the first quarter of 2003 from 1.4 pct in the previous quarter and the University of Michigan consumer sentiment index, which rose to 86 in April from 77.6, had little impact on the greenback.

Week ahead, markets will keep on pondering the health of the US economy and the future path of interest rates, with speech by Federal Reserve chief Alan Greenspan and monthly US jobs figures on the top of next week's agenda. In Europe, Germany's Ifo survey of business confidence will be eagerly awaited.

Range for the week: $ 1.0700 - $1.1200

Japanese Yen

The yen began the week on a fragile tone as Japanese investors aggressively bought euro-denominated bonds and other high-yielding assets of other economies such as Australia, New Zealand and Canada Comments by Bank of Japan Governor Toshihiko Fukui also supported the case for Japanese buying of euro-denominated assets.

Fukui said foreign exchange markets should reflect fundamentals and that he would accept a weaker yen if the market's perceptions of the economy were weak. He also added that it was unrealistic to try to guide the yen dramatically lower and that weakening the yen could only be an option if the international community agreed to Japan adopting such policy.

On the economic front, markets shrugged off Finance Ministry data that indicated Japan's trade surplus fell 23 pct in March from a year earlier as exports to the key U.S. market slowed due the Iraq war and higher oil prices pushed up imports costs. Japanese unemployment rates, which rose to 5.4 pct in March, just below January's record high of 5.5 pct, also had a muted reaction on the market.

Heading into the end of the week, market's concerns grew over Severe Acute Respiratory Syndrome (SARS), a new virus-borne ailment that is crimping economic activity in Japan and the region in general. Additionally, North Korean jitters came back to the fore after U.S. administration source said that Pyongyang had told the United States during nuclear talks in Beijing that it has nuclear weapons.

News of a nuclear arsenal in North Korea, a potential threat to Japan's security, did not come as a surprise, but the failure to agree on any significant issue at the talks had weighed on the yen. Next week, market's attention will be on the Bank of Japan's policy board meeting, which is expected to keep the target range for current account deposit unchanged.

Range for the week: 117.00 -122.00

Sterling

Sterling touched a four-year low against the euro and rallied versus the dollar as the Europe's common currency firmed across the board at the beginning of the week.

Speculation about Britain's potential to adopt the euro also weighed on the pound, as the June deadline loomed for Chancellor of the Exchequer Gordon Brown to present his assessment of the country's readiness for the single currency. A report by UK's Financial Times also said that Prime Minster Tony Blair has agreed to rule out an early referendum on British entry to the euro.

Mid week, the U.K. unit trimmed some of its losses after the minutes of the Bank of England's April Policy meeting dimmed expectations of near-term rate cut. The Bank of England's Monetary Policy Committee was split 7-2 in its decision to keep interest rates steady in April, compared with 8-1 vote on March.

MPC members also remarked in the minutes that the weakness of the sterling was one reason for keeping interest rates on hold at 3.75 pct. On the last trading day, the pound was pressured by data that showed the British economy grew at the weakest pace in a year in the first quarter of 2003.

Britain's gross domestic product rose by 0.2 pct in the first quarter, weaker than forecast and half the rate seen in the previous quarter. The figure gives slightly more reason for the Bank of England to reduce its interest rate next month.

Next week, the Confederation of British Industry releases its quarterly industrial trend survey. The report could make gloomy reading with worries over the impact of the war in Iraq and ongoing sluggishness in the global economy.

Range for the week: $ 1.5700 - $ 1.6200.