US dollar's dive a nasty surprise

Euro

The euro commenced the week on a strong foot after the Group of Seven called for flexible currency regimes.

Rather than its usual promise to 'monitor exchange markets closely and co-operate as appropriate,' the G7 meeting reaffirmed that exchange rates should reflect economic fundamentals.

'We emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms,' the communiqué said.

Markets viewed the statement as criticism of persistent intervention by Asian countries to keep their currencies weak for the benefit of their export markets.

As a result the greenback's weakness against the Japanese currency drove the dollar lower against the European single unit. Furthermore, market took U.S. support for the G7 statement as a departure signal from the U.S. strong dollar policy.

However, speaking from Dubai, U.S. Treasury Secretary John Snow denied a shift in the policy. A weaker dollar helps the U.S. to export more and tighten its current account deficit. However, Europe is concerned that the euro would have to bear the brunt of this adjustment since the exchange rates between the U.S. and Asia are not moving and the euro is the only one that can move.

Wim Duisenberg, president of the European Central Bank said that the monetary authorities were willing and able to take action to ensure that currency adjustments were smooth and gradual.

As the week progressed dollar-suffered more losses after oil cartel OPEC issued a shocking announcement that it would cut oil production. The news hit stocks in the United States and clouded the global economic outlook.

The greenback extended its losses against the euro and touched $1.1537 level. Mixed U.S. economic data provided little support for the greenback. Orders for durable goods fell 0.9 percent in August, the first drop since April.

The number of first time jobless claims fell in the week ended Sept. 20 to 381,000 from 400,000 a week earlier. This was followed by data on home sales both new and existing, which beat the expectations.

Sales of new homes in August rose to an annual rate of 1.15 million units and sales of existing homes rose to a record high annual rate of
6.47 million units.

dditional support for the dollar came from euro land after influential German Ifo survey for business conditions fell to 79.2 from 79.9, even though the main business climate index rose for a fifth month in a row in
September.

In the last trading day greenback traded below the $1.1500 level against the euro after data on U.S. economic growth and consumer sentiment offered both good and bad news for the U.S. economic outlook.

U.S. Commerce Department reported that seasonally adjusted Gross Domestic Product for the second quarter was 3.3 percent, slightly higher than an expected 3.1 percent. However, University of Michigan survey showed consumer sentiment declined in September to 87.7, down from 89.3 in August and below forecast of 88.5.

In the coming week, European Central Bank (ECB) is widely expected to leave interest rates unchanged on Thursday. Next week's data out of U.S. includes the consumer confidence due on Tuesday and payrolls and unemployment on Friday. On Wednesday the ISM index for September is expected to rise to 55.0 from 54.7 in August.

Range for the week: $ 1.1200 - $1.1700.

Japanese Yen

The Japanese yen peaked against the U.S. dollar at the onset of the week after the Group of Seven called for flexible currency regimes.

The G7 called on Asian governments to loosen their grip on currencies, many of which have pegged tightly to the dollar, prompting speculation that Japan will find it difficult to conduct aggressive currency intervention.

Moreover, the uncertainty about who would replace Masajuro Shiokawa as Japan's finance minister and what stance he will take on foreign exchange policy also gave the yen a boost.

Meanwhile, Japanese officials insisted that G7 statement did not represent an appreciable change to their forex policy. Japan is concerned that a rapid rise in the yen could jeopardise the country's tentative export-led recovery and has sold some nine trillion-yen in currency intervention already this year.

Concerns that Japan might again sell its currency have intensified amid a string of statements from Japanese officials. Japan's new trade minister, Shiochi Nakagawa, warned against sudden moves in currencies. Japan's top financial diplomat, Zembei Mizoguchi, said authorities were ready to intervene against a rising yen if necessary.

Japan's new finance minister, Sadakazu Tanigaki, warned against the yen's recent surge, saying it called for attention and that the G7 statement did not herald a shift in the country's foreign exchange policy.

In addition yen lost some of its gains after a series of strong earthquakes racked Japan's northernmost main island of Hokkaido. The earthquakes injured more than 150 people and caused blackouts at more than 16,000 households and other widespread damage, although Tokyo's financial centres remained unaffected.

Furthermore, yen came under additional pressure after data from Ministry of Economy, Trade and Industry showed retail sales in Japan fell by 2.0 percent in August from a year earlier as unseasonably cool and wet weather subdued spending.

Yen ended the week on a strong note despite threats of yen-weakening intervention by Japanese officials as the end-September fiscal half year mark tends to coincide with repatriation of funds into yen by Japanese companies as they sell some foreign assets for accounting reasons.

In the coming week, Japan is set to take centre stage with the focus on how it would tangle with a strengthening yen. Upbeat signs about the Japanese economy are likely to fuel more demand for the yen.

The key 'tankan' corporate sentiment survey from Japan is expected to show improvement from the previous quarter.

Range for the week: 109.00 -114.00.

Sterling

Sterling enjoyed a rally against the dollar as investors continued to seek alternative destinations for their funds in the wake of the greenback's recent dive.

Furthermore sterling benefited from a view that has gathered weight throughout the month, that Britain will be the first Group of Seven- (G7) country to raise interest rates.

Sterling picked up further speed against the dollar and touched 2-1/2 month highs of $1.6630 after the communiqué from a G7 finance ministers' meeting reduced expectations of Japanese intervention to weaken the yen, and this led to broad based losses in the greenback.

Range for the week: $ 1.6350 - $ 1.6850.