Weaker US dollar seems official policy

The chairman of the world's most powerful central bank will testify on the outlook for U.S. economy before the congressional Joint Economic Committee on Wednesday. U.S. Treasury Secretary John Snow is expected to ask Europe and Japan to do more to stimulate growth, putting more pressure on the European Central Bank to cut rates.

Euro

The week started with greenback's decline accelerating after U.S. Treasury Secretary John Snow said the dollar's slide is helping to boost U.S. exports and that exchange rate are ``best set'' by the market.

Snow's remark raised speculation that the US administration was happy with the dollar's downtrend despite its repeated vocal support for the currency. On another programme, Snow said Washington was committed to a strong dollar.

His comments send mixed signals in the market but the analysts thought that his export remark sounded more honest. John Snow also expressed his opposition to attempt by monetary authorities to unduly influence currencies by intervening in the market. He also said that Europe and Japan should not blame a weaker dollar for their economic woes, adding that devaluing the euro and yen was not a way to boost long-term growth.

As the week progressed, the euro gathered strength on the back of ailing US dollar and touched a new four-year high of $ 1.1625 with no signs of any kind of support for the greenback. Economic data from the US also weighed in, the trade deficit swelled to $43.5 billion in March, its second highest level on record.

However, some profit taking by traders pulled the euro back from its near four year high. The euro's strength is drawing complaints from European firms and government officials. French Finance Minister Francis Mer chimed in saying the euro's rise against the dollar was "not very favourable in terms of (European) growth," and that there was room for movement on monetary policy.

As for the U.S. economy, April retail sales fell 0.1 per cent versus a forecasted 0.4 percent increase, indicating a pillar of the U.S. economy might be showing some fatigue. Sales excluding autos fell 0.9 percent, the biggest drop since September 2001.

In euroland, some analysts said the euro was beginning to bear the weight of bleak European fundamentals. Gross domestic product growth was estimated flat in the first three months of this year as measured against the last quarter of 2002, and 0.8 percent up from a year earlier, as Germany and Italy, two of the euro zone's biggest economies, suffered a quarterly contraction.

The German parliament's economic affairs committee told the European Central Bank to cut interest rates as finance ministers from the world's seven largest economies gather to discuss ways to boost growth.

``The ECB has room to cut rates,'' Rainer Wend, the committee's chairman and a member of Chancellor Gerhard Schroeder's Social Democratic Party, said in an interview. Wend's comments, which follow similar calls from French and Italian officials, come as German Finance Minister Hans Eichel prepares to meet his counterparts from the Group of Seven major industrial nations and Russia.

The economies of Europe's euro region and Japan both failed to grow last quarter as the dollar fell against their currencies. The ECB, whose benchmark rate of 2.5 percent is twice that of the U.S. Federal Reserve, is under pressure to reduce borrowing costs because the finance ministers probably won't say anything at the G7 meeting to halt the dollar's slide.

Exports account for 35 percent of the euro region's gross domestic product. ``The euro is as high as it can go without causing damage to exports,'' said Wend.

The economy of the 12 nations sharing the euro is on the brink of recession, according to European Union figures released last Thursday. Gross domestic product shrank 0.2 percent in Germany, 0.1 percent in Italy and 0.3 percent in the Netherlands. France's trade surplus was almost erased in March as exports dwindled.

The dollar remained weak against the euro and yen after an U.S. government report showed consumer prices fell in April by the most in 18 months as sluggish consumer demand led companies to cap prices.

A separate government report showed housing starts declined last month to the slowest pace in a year. The U.S. currency dropped even after a report showed a consumer confidence index compiled by the University of Michigan rose to 93.2 in May, compared with economists' expectations for 87. In April, the index registered at 86.

The dollar had its biggest drop against the euro in 10 months as investors speculated that ministers at a Group of Seven meeting this weekend wouldn't take action to stop the dollar's 21 percent slump in the past year.

Range for the week: $1.1200 - $1.1700

Yen

Japanese yen started the week on a cautious note because of wariness that Japanese authorities could intervene to stem the yen's rise.

Japan's top financial diplomat, Zembei Mizoguchi said that the yen's rise against the dollar was not warranted when looking at relative economic fundamentals. He also said that the finance officials are watching for any "excessive" movements in the currency.

US Treasury Secretary's remark on unduly influencing currencies by intervention has made it difficult for the Japanese authorities to intervene aggressively in the foreign exchange market.

Data last week showed Japan spent 2.39 trillion yen on currency market moves in the first quarter. Tokyo has stepped into the currency market to curb the yen's gain, trying to protect its huge export to the United States.

Mid-week, there was some verbal support by the Japanese authorities who said that the government will act "decisively" against rapid moves in the market. Poor US retail sales data helped the dollar bear to push the yen to a high of 115.30, its lowest level since February 2001.

There were talks in the market that the Bank of Japan, acting on behalf of the Finance Ministry, stepped into the market after the dollar fell to 115.30 yen.

U.S. Treasury Secretary John Snow and Japanese Finance Minister Masajuro Shiokawa said they didn't discuss currencies when they met in advance of the G-7 gathering at Deauville, France.

Range for the week: 114.00 - 119.00

Sterling

Sterling fell to a record low against the buoyant euro but was up near a three-month high versus the dollar, which was hit by fresh doubts over the United States' determination to maintain a strong currency.

Data showed the UK March global goods trade deficit rose to 3.6 billion pounds, versus a consensus forecast of 3.5 billion, also the number for February. The non-EU goods trade deficit came in at 2.7 billion pounds versus a consensus forecast of 2.2 billion.

Other data out showed a fall of nearly a fifth in oil prices last month in the wake of the end of the Iraq war helped push British factory gate prices down. The Office for National Statistics said output prices dropped 0.1 percent on the month in April, the first drop since last November, to stand 1.7 percent higher than a year earlier. Economists had expected a small rise on the month.

In its quarterly inflation report, Britain's central bank forecast that economic growth would pick up sharply in the second half of this year as the pound's recent slide against the euro should bolster demand for British Goods abroad. The inflation report was more upbeat on growth than many expected.

The pound's recent fall against the euro has removed a key obstacle to Britain joining the single currency, but may have added a new one. Sterling's decline has brought it to what is widely seen as a more "normal" level for euro membership, but the speed of the drop could mean Britain falls foul of an expectation that a currency be stable for two years prior to joining.

When Chancellor of the Exchequer Gordon Brown presents the results of his five tests on euro entry to parliament in the coming weeks, it is widely believed he will say "yes, but not quite" or "no, not yet".

Euro's steep rise this year, which has seen the pound fall more than 12 per cent to around 71.5 pence to the euro, or 2.74 deutsche marks in old money, has brought it back to what most would agree is a sensible entry rate. British Prime Minister Tony Blair and Gordon Brown went public to deny any rifts over joining the Europe's single currency.

Range for the week: $1.6000 - 1.6500