A roller-coaster ride for currencies (page 1 of 2)

The European Central Bank delivered it's most aggressive rate cut in history by lowering rates to a record low of 2.0 pct, whilst the Bank of England decided to wait and left rates steady at 3.75 pct.

Both decisions triggered rallies in the respective currencies, but an encouraging reading on US non-farm payrolls helped the dollar regain some respectability at the end of the week; although many analysts believe that the greenback is likely to retain it's weakness for a prolonged period of time.

Euro

The euro kicked off on a defensive mode as a meeting of the world's most influential leaders commenced in Evian, France with markets speculating on a joint call for strengthening of the US dollar.

Comments by world leaders who called for a return of the dollar's strength seemed to be keeping a check on the buoyant euro as it was stuck in a range between $ 1.1650 - $ 1.1700. As the G8 summit drew to an end, the dollar started yet another slide as the failure by the G8 to make a joint communiqué on currencies prompted market players to commence selling the US unit.

The dollar's bullish sentiment was further dampened by the release of disappointing US manufacturing and construction data, which cast yet another shadow on the economic prospects of the United States. The Institute for Supply Management reported that its May manufacturing index rebounded to 49.4 from 45.4 in April, although still below the critical 50 level that separates growth from contraction.

The data failed to help the dollar as markets started focussing their attention on the upcoming ECB interest rate decision, with many analysts betting on a cut of 50 basis points. Federal Reserve chairman, Alan Greenspan, added some solace to the dollar's woes, after he said that the pace of growth in the US economy would quicken, but warned that it would be slower than some forecasts had implied.

He further stated that the risk of deflation was remote, and said that the cost of insuring against it was very low, leading the market to conclude that there was a greater chance of a rate cut at the next Fed meeting scheduled for the end of June.

Mid-week, as expectations of a yield-reducing interest rate cut by the European Central Bank gained momentum, the once high-flying euro came under pressure as dealers adjusted their positions by dumping the single currency against major currencies.

The dollar regained some lost ground after the US Institute of Supply Management said that it's May non-manufacturing index on the services sector rose to 54.5 from 50.7 in April, against forecasts of a reading of 52.0.

The European Central Bank, which met on Thursday, sprang no surprises and announced that it was trimming interest rates by 50 basis points, bringing the bench mark euro zone interest rate to it lowest level ever at 2.0 pct.

This rate cut proved to be a blessing in disguise as markets focussed on the long-term benefits of the rate cut to the European economy, rather than the narrowing of the interest rate differential between the two continents.

The euro rallied almost 2 pct in the aftermath of the ECB decision, whilst the release of US data indicating the largest drop in US factory orders for 17 months also aided the dollar's downfall. Analysts said that increased demand for the single currency from Arab and Middle Eastern investors, reluctant to invest in US treasuries was also seen as a factor supporting the single currency.

As the week drew to a close, the greenback staged a rally of its own after May US jobs data were considered not as bad as expected allowing the dollar to recover some lost ground.