Dollar falls blow by blow

A weekend explanation by US Treasury Secretary John Snow, who stated that the dollar's decline had been 'orderly' is likely to form a lethal
combination with earlier concerns over geo-political issues and the twin deficits in the US.

With the greenback being undermined by deepening investor concern over the widening US external imbalance in a low interest rate environment despite stronger economic performance, the single currency is likely to ascend to $ 1.3200 by the end of Q2 2004.

Euro

The European single currency kicked off on a strong pedestal helped by the previous week's release of weaker-than-expected US jobs data, and continued to add pressure on the greenback.

The dollar, which was undermined by geo-political risks and concerns over a bulging US current account deficit, was given some respite by expectations of a change in the Fed's stance on US interest rates.

The focus fell on a key phrase about interest rates staying low for a 'considerable period' of time, as some analysts were of the view that the Fed may drop the phrase in light of recent data showing improving economic activity in the United States.

Meanwhile, policy makers of the Federal Open Market Committee announced that interest rates in the US would remain at a 45-year low of 1.00 percent and reiterated their intent to keep rates low for a 'considerable period'.

The Fed also said that the country is still struggling to attract foreign capital, but added that the probability of an unwelcome fall in inflation had diminished and said that they saw the possibility of higher inflation in future.

As the dollar continued to fall, a sudden bout of intervention by the Bank of Japan caused a temporary reversal in the trend as the market was caught off guard. The US unit surged due to the Japanese intervention and remained steady against the euro, although it was poised for further losses due to the overall bearish trend.

Comments by ECB governing council member Ernst Welteke, who stated that the euro is near its long - term average value and that it should not harm the competitiveness of European firms, added further support to the single currency.

The view that the tolerance threshold of policymakers of the euro zone had yet to be tested underscored by a survey showing optimism among German investors and analysts also added support to the euro.

A rise in US retail sales for November did not help either, as it was counterbalanced by a rise in US weekly jobless claims and taken together proved modestly positive for the dollar.

As the week drew to a close, the dollar took another hammering after the release of US economic data which painted a mixed picture of the world's largest economy. The downward move was triggered by the University of Michigan's consumer sentiment index which showed a surprising decline to 89.6 in December from a final reading of 93.7 in November, against forecasts of a rise to 96.0.

Meanwhile, other data showed that the US trade gap widened to $ 41.77 billion, while inflation at producer level fell unexpectedly by 0.3 pct in November.

With the year 2003 drawing to a close and liquidity levels easing, the dollar is likely to remain under pressure in the week ahead whilst the release of the US current account deficit - expected to stand at 5.0 pct of GDP, is likely to accelerate the dollar's fall.

In other data, the release of US Consumer Price Index and Industrial Production and the German Ifo survey is likely to provide further insight into the economies of both the United States and the euro zone.

Range for the week: $ 1.2020 - $ 1.2520.

Japanese Yen

The Japanese yen opened its account on an aggressive note as it notched up considerable gains against the dollar, and tested fresh three-year highs due to broad based dollar weakness brought forward from the previous week.

As the yen remained on a firm footing, dollar bears continued to pounce on the currency due to concerns over Washington's handling of post-war Iraq and worries over widening US trade and current account deficits.

Despite the overwhelming bearish trend, the greenback's losses against the yen was limited due to widespread caution against possible yen-selling intervention by the vigilant Bank of Japan.

Japanese officials kept up their jawboning intact with the country's top financial diplomat, Zembei Mizoguchi, saying that he did not expect the dollar weakness to continue, given the strength of the US economy.

As the week progressed, the dollar kept tumbling, prompting the Bank of Japan to act, as another round of intervention kept the yen at bay and drove dollar bears away.

Although Japanese officials declined to comment on the latest round of intervention, a top government spokesman admitted that, 'appropriate steps were being taken' to curb the yen from strengthening any further.

Some market players estimated that Japan sold around one trillion-yen ($ 9 billion), but the exact figure was unknown due to authorities'
reluctance to confirm its action. Japan has sold almost 18-trillion yen in the first 11 months of this year, whilst the figures for December will be released at the end of the month.

Meanwhile, the release of a stronger-than-expected 'Tankan' survey had little impact on the exchange rates as the yen hardly flinched, with traders hesitant to buy the currency due to concerns over possible intervention by Japanese authorities.

The survey showed that big Japanese firms were more confident about business conditions than at any time in the past six years - a reason likely to keep the yen well bid in the forthcoming week.

Range for the week: 104.40 -109.40.

Sterling

The British Pound commenced the week on an optimistic note as it continued to draw support from broad-based dollar weakness and a sound economy offering higher yields in comparison to its other G7 counterparts.

Analysts widely expect the Bank of England to raise interest rates early next year. Sterling, which traded close to five-year highs at the onset was given a shot in the arm after data showed that British manufacturing output surged by 1 percent in October, reinforcing expectations of further rate hikes in the near future.

With dollar bulls having been disappointed by the Fed which stuck to their phrase on interest rates, sterling regained its momentum as it rallied to levels not seen since the aftermath of its 1992 Black Wednesday debacle and its exit from the European Union's exchange rate mechanism.

Meanwhile, the mid-week release of a confederation of British Industry survey showing manufacturing order books at an 18-month high had little impact on the pound, with many saying that markets have already priced in faster UK growth and higher interest rates.

The week ended in the same fashion it started as the dollar renewed its downward spiral due to fresh concerns that a recovering US economy
would do little to bridge the widening current account deficit, allowing the British pound to test $ 1.7500 for the first time since October 1992.

The release of UK retail sales and unemployment next week is likely to shed further light on the prospects of the UK economy, while developments across the Atlantic will also be watched closely for further signs of dollar weakness.

Range for the week: $ 1.7260 - $ 1.7760.