Markets challenge BoJ on intervention

Euro

The euro commenced the week on a shaky note following Sweden's thumbsdown to joining the single currency took some pressure off the U.S. dollar, which had been hit by data suggesting that the pace of economic recovery in the United
States may not be rapid.

The ' No' case won a decisive 56 percent of the vote in the Swedish referendum, defying expectations of a 'Yes' outcome in sympathy of
the slaying of pro-euro foreign minister Anna Lindh last week.

The dollar continued to soar against its European rivals, indirectly lifted by the rallying of the yen as investors ignored a Federal reserve decision to leave interest rates steady. The yen's sharp gains, particularly against the euro, commanded more market attention than the Fed's policy-setting committee.

The central bank kept its overnight lending rate at a 45-year low of 1 percent, but warned of a risk that inflation could become 'undesirably low'. Meanwhile, weaker-than-expected consumer price numbers for August hardly made a dent on the dollar's overall performance.

August CPI data showed an increase of 0.3 percent, slightly lower than market expectations of a 0.4 percent rise. But excluding food and energy costs, the core 'CPI' was up 0.1 percent last month, compared with a rise of 0.2 pct in July.

The following day, luck switched hands and the dollar was hammered as a wave of profit-taking caused the greenback to retrace its previous gains. What has hurt the dollar is the fact that the Fed indicated an accommodative policy stance for a sustained period.

With interest rates expected to remain at current lows for some time, investors have temporarily disregarded the U.S. economic rebound story
and started looking once again at high-yielders such as Australian, New Zealand and Canadian dollars.

The last trading day witnessed the dollar slip to a low of $1.1380 levels against the euro. The release of the weekly applications for U.S. jobless benefits fell to 399,000, below the widely watched 400,000 mark and offered the dollar a temporary, but fleeting respite.

This was followed by a rise in a key U.S. economic
forecasting gauge in the month of August, the index of leading indicators, suggesting that economic growth will strengthen further in the second half of the year.

Meanwhile, the International Monetary Fund,which is meeting in Dubai until next week, said the world's largest economy is showing signs of life but a ballooning U.S. budget and trade deficit could spell trouble ahead. The IMF also warned the U.S. current account deficit had to unwind some day and this could provoke a sharp drop in the dollar.

In the coming week, the German Ifo business sentiment index is forecast to rise further in September after hitting 90.8 a month ago. U.S. durable goods are expected to rise 0.6 percent in August after a 1.0 increase in the previous month.

Final estimates of Q2 growth and September University of Michigan consumer sentiment are also due on Friday.

Range for the week: $ 1.1100 - $1.1600.

Japanese Yen

The yen peaked against the U.S. unit at the onset of the week on bullish Tokyo stocks and brighter prospects for the Japanese economy.

However wariness of intervention prevented aggressive buying of the yen. Rumours that European fund operators were rebalancing portfolios to increase the weighting in the Asian currencies, including the yen, also helped the Japanese unit.

The dollar struggled against the yen, after its break below the key psychological level of 115 yen and crashing to a low of 113.58 levels, prompted views that Japan is taking a more relaxed stance on intervention.

Traders had speculated that Japan's monetary authorities would soften their stance in the run-up to the weekend Group of seven meeting in Dubai, to deflect criticism from counterparts.

Markets players are now starting to think Japan may be forced to curtail yenselling even after the G7, where its intervention may be attacked as an unfair way of supporting exporters to ensure a recent pick-up in the economy is maintained.

Further adding fuel to fire were statements from BOJ governor Toshihiko Fukui downplaying speculation that Japan's foreign exchange policy would come under closer scrutiny.

In the coming week, Japan is set to take centre stage in the financial markets, with the focus on how a new cabinet after a weekend party election will grapple with a strengthening yen and signs of economic recovery.

Japan's ruling Democratic Party holds a party election today and current leader and Prime Minster Junichiro Koizumi is expected to win and lead into a general election many foresee in November.

Official comments from the G7 meeting will also be scrutinised as pressure grows on Asian nations to let their currencies rise to help adjust the U.S. current account deficit, a key issue ahead of a 2004 U.S.presidential election.

Range for the week: 112.00 -117.00.

Sterling

Sterling enjoyed a rally against both the dollar and the euro as markets greeted Sweden's rejection of the single currency as a sign that U.K. was unlikely to hold a referendum on the issue anytime soon.

The pound was also underpinned after minutes of the latest Bank of England meeting showed some policymakers contemplating a rate rise. Minutes from the Monetary Policy Committee's September 4 meeting showed all nine members voted to keep interest rates steady at 48-year lows of 3.5 percent.

But they also showed debt and consumption growth suggested to some on the committee that a rate rise may soon be needed. Sterling leapt to its highest against the dollar since late July above $1.6300 levels on the last trading day as the U.S. currency succumbed to a wave of selling ahead of the weekend meeting of the G7 finance ministers in Dubai.

Range for the week: $ 1.6100 - $ 1.6600.