Euro strength is really dollar weakness

Euro

The Euro surged to four-year highs against major currencies at the start of the week as global investors tied up with the dollar's weakness, kept pouring money into the higher-yielding currency.

Investors continued to review currency allocations, shifting funds from the dollar to European currencies on worries about the U.S. economic outlook on the back of twin deficits in the current account and the budget. Positive economic news from the United States was given a deaf ear with markets focusing only on large flow of funds into euro.

The Institute for Supply and Management (ISM) said its index of non-manufacturing sector which comprises about two-thirds of the U.S. economy, showed the sector expanded in April. The index rose to 50.7 in April from 47.9 in March. Expectations were for the index to rise to 48.8.

The euro continued to motor ahead, after the Federal Open Market Committee meeting ended with a decision to leave the U.S. interest rates unchanged while warning the economy remains at risk for further weakness. The Fed said the easing of global tensions associated with the war in Iraq had abated, thus lifting the primary impediment to an economic rebound.

But the central bank cautioned that the timing and extent of a recovery remained uncertain and indicated it was prepared to cut rates again to ward off further economic weakness. Meanwhile, European policy-makers reacted favourably to the euro's rally with ECB Governing Council member Ernst Welteke stating the rising euro was not holding back eurozone growth and was no cause for concern.

On the last trading day, the European single currency vaulted to a life-time high versus the yen and its best since January 1999 against the greenback after the European Central Bank's decision to keep interest rates on hold gave new legs to its rally.

The euro, which has gained eight percent on the dollar and six percent on the yen in the past month, peaked to $1.1535 versus the U.S. unit and 135.30 on the yen. The latest surge was also fuelled by ECB chief Wim Duisenberg's comment that there was nothing excessive about the current level of the euro.

Figures on U.S. consumer sector will top the bill of next week's data as investors search for insight into the spending that is vital for growth in the world's largest economy.

Range for the week: $ 1.1200 - $1.1700

Japanese Yen

The dollar commenced the week on a positive tone against the Japanese yen supported by US Treasury Secretary John Snow's comments backing a strong currency and worries over possible yen-selling intervention by Japan.

But sentiment towards the greenback remained bearish with traders holding to their cautious views on the U.S. economic outlook, especially after the Federal Reserve sighted a possible unwelcome substantial fall in inflation.

Comments by Japan's top financial diplomat Zembei Mizoguchi helped in the dollar's rise against the yen as well. He said current moves in the foreign exchange markets were short-term and authorities would take action if necessary.

Midweek, however, the dollar hit a ten-month low of 116.07 versus the yen in a rapid sell-of that tested Japan's resolve to protect its vital export sector by keeping its currency weak against the dollar.

Broad dollar weakness converged with heavy euro/yen liquidation, dragging the dollar down against the Japanese currency. However, the greenback managed to recoup its gains as nervous traders bought the dollar back on fears that Japanese authorities were ready to intervene.

Comments by Finance Ministry officials also added to market fears with Zembei Mizoguchi saying moves in the currency markets in the past one to two weeks had been rapid, warning that officials would intervene if they saw the need.

In addition, buying by Japanese importers also helped the dollar cushion itself from further falls. Furthermore, thanks to euro's rise against the Japanese currency, the dollar was trading at 117.30 before trading closed for the week.

Rumours also swirled amongst market participants that Japan may have intervened when the yen appreciated to 116.00 levels. Meanwhile Finance Ministry Officials declined to comment on whether Japan had intervened.

Range for the week: 115.00 -120.00.

Sterling

The British pound slid to a six-year low on trade-weighted basis as concerns the Bank of England would cut interest rates later in the week sent the pound crashing through key chart levels.

Investors have recently rewarded currencies with high or rising interest rates, so lower British rates would damage sterling by reducing the return on sterling deposits.

In addition, data showing British manufacturing output fell more than expected did the pound no favours. British manufacturing output fell a bigger than expected 0.4 pct in March, the worst performance since last October.

Meanwhile, the BoE left its benchmark interest rate unchanged at 3.75 percent. The retention of Britain's wide yield advantage over the United States lifted sterling to $1.6079. In the coming week, economic data from Britain includes unemployment, inflation and producer price data.

Range for the week: $ 1.5800 - $ 1.6300.