US dollar lurches up and down

Euro

The euro began the week on a weak tone, taking a hit from selling by Japanese exporters after a report said that the world's second-biggest retailer, Carrefour, was seeking a tie-up with struggling Japanese retailer Daiei Inc.

Further pressure on the euro came from remarks by OPEC President Abdullah al-Attiyah who said, the oil cartel would not switch dollar-denominated oil sales to the euro despite the fall in the value of the greenback.

The dollar's gain was dampened after Freddie Mac the second-largest mortgage finance firm fired its President over an accounting scandal, which generated concerns over the health of U.S. assets. The President and chief operating officer of the government-chartered company was fired for not fully co-operating with the counsel to the audit committee reviewing its earnings statements from 2000 through 2002.

In the wake of the accounting scandals surrounding the collapse of Enron Corp and WorldCom, financial markets are sensitive to any suggestions of corporate malfeasance.

Comments by U.S. President Bush reiterating his administrations support of a strong dollar policy provided some relive for the dollar. The President noted that while interest rate differentials between Europe and the US have played a role in weakening the dollar, the narrowing of interest rate spreads following the European Central Bank's rate cut would "change dollar investor behaviour".

Moreover, ECB President Wim Duisenberg provided additional aid for the greenback when he said in an interview that the central bank had room to manoeuvre on interest rates. He added the interest rate differential between the eurozone and US provides the central bank further scope to ease monetary policy. The ECB President also noted that strong euro hurts euro land exports to the United States.

Mid-week the European unit regained some lost ground after a series of comments came out from ECB officials regarding the future direction of interest rates. ECB officials made a concerted effort to douse market expectations of an additional rate cut.

In a testimony before the EU Parliament, Wim Duisenberg emphasised monetary policy alone was insufficient to stimulate economic growth. He undercut his previous remarks as he said it was too soon to discuss further interest rate cuts.

In addition ECB governing council member Nout Wellink said that based on inflation projections, the ECB expected a recovery in the second half of the year and saw no reason to cut interest rates further. Growth fears in the euro land failed to restrain the single currency despite data showing more than expected fall in German industrial production.

Mixed bag of U.S. economic indicators further undermined the dollar as the week was coming to an end. Data showed Retail Sales rose 0.1 percent in May while initial jobless claims remained above the key 400,000 threshold. Jobless claims fell by 17000 to 430,000.

Data indicting that U.S. trade deficit narrowing slightly more than expected in April, to $42.03 billion, from $42.87 billion in March provided caution for the dollar. However, the dollar shed all its gains when U.S. consumer sentiment fell unexpectedly in June.

University of Michigan said consumers had turned pessimistic in June. Consumer sentiment slipped to 87.2 from May's 92.1 contrary to economists' prediction that the figure would rise.

The data fanned financial markets expectations that Federal Reserve may have to cut interest rates to stimulate the troubled economy, which would further increase the appeal of euro zone assets. The Fed meets on 24-25 to decide on interest rates, which are already at a four-decade low of 1.25 percent.

Range for the week: $ 1.1600 - $ 1.2100.

Japanese Yen

The Japanese yen commenced the week trapped in narrow ranges versus the dollar as nervousness crept into the market over how the Freddie Mac story would develop.

Japanese institutional investors are believed to hold large volumes of bonds issued by the company. Data released from Japan showed, that companies cutting back on machinery orders in April, indicating concern over their future prospects.

Furthermore, Japan's trade surplus fell 0.6 percent to 993.8 billion yen in April compared with a year earlier as global demand for Japanese exports such as cars and electronics slowed.

Japanese yen gained versus the dollar as the week progressed due to mixture of factors including demand from foreigners buying Japanese stocks and from domestic firms preparing to transfer assets to state pension funds. Japanese Central Bank as expected left its monetary policy unchanged, leaving its current account deposits target at 27 to 30 trillion yen.

The BoJ stepped up its efforts to alleviate funding problems at small business promising to buy debt securities including those considered below investment grade. The central bank said it would buy up to one trillion yen in asset-backed securities with credit ratings as low as BB, a move aimed at helping small firms having difficulties borrowing from Japan's struggling banks.

At the end of the week yen was not able to gain further on the back of troubled dollar, due to fear of Bank of Japan intervention. Zembei Mizoguchi repeated his comments that further rise in the yen was unwarranted and that authorities would act if needed to correct excessive moves in the foreign exchange market.

A stronger yen may help push Japan into recession for the fourth time in 12 years as it makes it more difficult for exporters to compete with rivals overseas and reduce their revenue from outside Japan in yen terms.

Range for the week: 115.00 -120.00.

Sterling

Sterling tumbled at the start of the week after UK Treasury studies suggested its would need to weaken substantially before euro entry.

The pound was further undermined after British Finance Minister Gordon Brown sounded upbeat about euro entry prospects and left the door open for another review next year.

Brown told Parliament economic conditions are not in place to allow Britain to join the euro but he pledged to look again at the case for the euro entry in 2004 and said, if it was made, the government would hold a referendum.

However, mid-week, sterling nudged higher against the struggling dollar testing a three-and-a-half year peak of $1.6732 as market attention turned from Britain's debate on joining the euro to the pound high yield.

The pound has been buoyed recently by an attractive interest rate differential against both the dollar and the euro, which was augmented when the Bank of England kept rates steady last week while the ECB cut half a point. Currently sterling enjoys a 2.5 percentage yield over the dollar and 1.75 point spread over the euro.

Range for the week: $ 1.6450 - $ 1.6950.