US dollar's woes multiply

Euro

The US dollar started the week on a softer note, dangling near record low against the euro as its repeated failure to capitalise on recent strong US economic data disappointed the market.

Concerns over the snowballing US current account deficit and worries about Washington's handling of post-war Iraq appeared to eclipse a barrage of recent upbeat data.

The Institute for Supply Management's Manufacturing activity index rocketed up to 62.8 in November from 57.0 in October, overshooting economist forecast and reaching the highest level since December 1983.

An ISM official said the weaker dollar was helping US manufacturing exports. The dollar sell-off for weeks overwhelmed a string of strong economic data, including government report showing US workers operated more efficiently in the third quarter than at any time in the last 20 years.

As the week progressed euro kept on breaking key resistance level and breaking new highs against the badly battered and bruised US dollar. Euro's rise was also triggered in part by a leap in the Australian dollar in the wake of a rate hike by Reserve Bank of Australia.

The central bank lifted the cash rate by a quarter of a point to 5.25 percent citing a strong domestic economy and improving global conditions. Comments that Germany was not worried by the euro's latest surge gave added encouragement to euro bulls who bid the single currency above 1.2100 dollars.

The European Central Bank left its interest rate for the 12 members of the euro zone unchanged at 2%. The decision was widely expected by analysts and borrowing costs have now been held at their current levels since the start of June.

There have been increasing signs that the region's stagnated economy is finally beginning to pick up, easing the pressure on policy makers. A stronger euro, meanwhile, has checked inflation and trimmed import costs.

Speaking at a press conference in Brussels, ECB President Jean-Claude Trichet said, 'economic activity in the euro area has picked up. Growth in the third quarter reflects the strong momentum of the world economy which we assume will continue next year.'

He also said that ECB is looking forward to a gradual recovery in euro area economic growth over the next quarters, leading to a broader and stronger upswing in the course of next year and the year after.

However, the recovery is still fragile and there are still concerns over the German economy in particular. Some economists have argued that even though borrowing costs are at their lowest for more than half a century, the euro's gain might open the door for the ECB to cut rates further.

Most policy makers have until now indicated little concern with the euro's current level but German Deputy Finance Minister Caio Koch-Wesser said the euro should not have to bear the brunt of the dollar's weakness and intervention was always a possibility.

The German chemical association said strong euro would affect sales and earnings if the single currency rose sharply in 2004, and the head of German steel firm said euro above 1.25 or 1.30 dollar would be a worry.

The dollar dropped to a record low against the euro for a sixth consecutive day on Friday after a key report on the US labour market showed a smaller increase in new jobs than the market had expected. The greenback dropped to a lifetime low of $1.2177 against the single currency, after trading at $1.2070 ahead of the report.

The non-farm payrolls report, the key measure for monitoring developments in the US labour market, showed that just 57,000 new jobs were created in November, missing expectations for about 150,000. The unemployment rate edged down to 5.9 per cent.

Range for the week: $1.1800 - $1.2300

Yen

Dollar/yen started the week touching a high of 110.02 in early Asian trading time after Japanese government's decision to nationalise Ashikaga bank, which was found to be insolvent after latest inspection by government regulators.

Yen's fall was limited by Japanese exporters' interest to convert dollar-denominated revenues into yen. Overall weakness of the greenback also pushed yen higher but wariness of intervention by Bank of Japan limited the dollar slide.

A quarterly corporate survey by the Ministry of Finance showed that business sentiment at large Japanese companies improved in the October-December period from the previous month.

As the week progressed, Japanese yen broke the key 108 level against the dollar and was threatening to break the key 107.20 support but wariness of BOJ intervention kept the dollar bear at bay.

Japan's top financial diplomat, Zembei Mizoguchi, repeated his view that the dollar should be supported by US economic strength. Later in the week he also said that there was no change in the government's stance of acting in the currency market as needed.

Japan's business daily reported the government planned to raise its ceiling on intervention funds by 20 trillion yen to nearly 100 trillion yen when it compiles an extra budget for the fiscal year which ends in March.

By the end of the week greenback had tested a low of 107.53 yen and closed the week a touch higher.

Range for the week: 106.50 - 111.50

Sterling

Sterling kicked off by charging to a five year high against the dollar as the greenback came under renewed pressure across the board.

The pound was supported by data showing Britain's manufacturing sector expanded at its fastest pace in nearly four years in November and consumer credit and lending figures for October, which reinforced the market view that more British rate rise were on the way.

Sterling has gained more than 5 percent against the dollar in less than one month. A survey showed construction activity in Britain expanded in November at its strongest pace since June 2001.

Other economic figures released this week showed positive signs in both the service and manufacturing sector. But recent surveys from both the Halifax and Nationwide showed annual house price growth slowing in November from the previous month.

The Bank of England's Monetary Policy Committee kept UK interest rates on hold at 3.75%. The Bank had not been expected to take any action this month after it raised the cost of borrowing in November by a quarter percentage point for the first time in four years.

Further interest rate hikes are still expected in the first quarter of 2004. Sterling ended the week on a high note and touched 1.7322 after the greenback tumbled across the board.

Range for the week: $1.6900 - 1.7400