US dollar at a record euro low

Euro

The ailing dollar hit record lows against the euro at the start of the week on security worries and nagging concerns over the U.S. current account deficit.

The U.S. current account deficit, around 5 percent of gross domestic products, is proving to be one of the biggest weights on the U.S. currency. In thin holiday trade, the euro broke through important psychological level of $1.2500 against the greenback.

The euro's move higher gathered pace after the German government said it was not worried about the euro strength, adding there was no reason to consider taking measures to try to counter it.

This contrasted with a report in the Financial Times that quoted a senior European Central Bank official as saying the decline in the dollar had been relatively sharp and the euro's performance over the next four to eight weeks could influence the outlook on interest rates.

Meanwhile, the discovery of mad cow disease in the United States, encouraged traders to further shun the dollar. Midweek, the dollar continued its downward momentum against its European counter part, slumping to a life time low of $1.2647 after weaker-than-expected U.S. economic data eroded optimism on the economic outlook.

The reports on consumer confidence, manufacturing and home sales put the already retreating greenback under additional strain. The Conference Board's index of consumer confidence in December was 91.3, slightly undershooting expectations for a reading of 91.5.

Existing home sales declined to 6.06 million in November, below economists' forecast for 6.3 million. The December National Association of
Purchasing Management-Chicago business barometer declined to 59.2, below expectations for 62.2.

At the same, worries over possible terrorist attacks against the American targets also weighed on the dollar.

The U.S. dollar maintained a steady momentum on the first trading day of the New Year, after bouncing back from lows against the euro on relief there had been no major attacks in the West during the New Year celebrations.

Trade was also thinned by a Japanese market holiday, however, U.S. based banks were selling the euro, pushing it further away from its record high of $1.2647.

The dollar weakness is likely to draw attention to February's Florida meeting of finance ministers from the Group of Seven (G7) industrialised nations, as investors speculate how the group would react to the recent dollar fall.

A G7 source told Reuters that the group would look at the weakened dollar during the upcoming meeting starting February 6th. The G7 source also said that the European nations were becoming increasingly concerned about the dollar's fall, adding that a level of $1.3000 represented a 'pain barrier'.

Range for the week: $1.2300 - $1.2800.

Japanese Yen

Against the yen, the dollar stayed around the 107 yen levels as wariness over possible Japanese intervention outweighed geopolitical worries and concerns over a widening U.S. current account deficit.

Markets suspect the Bank of Japan intervened when the dollar fell to 106.90 yen on the first trading day of the week. Later Japanese Ministry of Finance data showed official intervention amounted to 2.25 trillion yen ($21.04 billion) in the month ending December 26. The yen showed little reaction to the intervention data, holding around 107 per dollar.

In the coming week, the dollar is likely to trade with a lower bias, however markets fear that a touch of 106.40 levels could result in another bout of intervention.

Range for the week: 105.00 - 110.00

Sterling

Sterling extended its gains to a 11-year high against the dollar as the greenback came under broad pressure in seasonally thin trade on concerns about the U.S. current account deficit.

The pound took its cues almost entirely from movements in euro/dollar, hitting a high of $1.7826, a level not seen since the aftermath of its 1992 Black Wednesday debacle and its exit from the European Union's Exchange Rate Mechanism.

The latest surge has brought sterling's gains against the ailing dollar this year to more than 10 percent. The Bank of England holds its January
interest rate meeting next Wednesday and Thursday with analysts expecting it not to add to November's interest rate hike just yet.

Many think the Bank's Monetary Policy Committee will hold off raising rates during the key January retail sales period and wait until it prepares the new forecasts for its next quarterly inflation report in February.

Rates are currently at 3.75 percent, having been raised by a quarter-point in November from a 48-year low of 3.5 percent.

Range for the week: $1.7500 - $1.8000