USD1.26-1.31 euro this week

Euro

The European single currency hit new highs against the dollar on concerns about the widening U.S. trade balance and expectations that U.S. interest rates will remain low for some time to come.

Federal Reserve Governor Ben Bernanke remarked at a meeting of the American Economic Association in San Diego, that while the U.S. economy appeared to have turned a corner, the central bank was right to hold interest rates at 45-year lows given the low rate of underlying inflation.

He also added that the risk of a 'dollar crisis' was low and the effects of the dollar's decline on inflation 'appear to be relatively small' because foreign producers tend to absorb most of the impact of the dollar's drop.

The prospect of interest rates remaining low is likely to encourage investment outflows from the U.S. to higher-yielding currencies at a time when the United States needs capital inflows to cover its current account deficit.

Meanwhile, the U.S. economic data schedule featured little to move forex markets. U.S. November construction spending increased 1.2 pct more than market's forecast. The Institute for Supply Management's December non-manufacturing index slipped to 58.6 from 60.1 in November and U.S. factory orders fell 1.4 pct, after rising 2.4 pct in October.

As the week progressed, comments from European officials helped the single currencies to move higher against the greenback. Belgian Finance Minister Didier Rynders called the current euro levels 'relatively reasonable' but added that too fast a change in the exchange rate would cause greater worry.

Additionally, Portugal's central bank head said the currency was close to its historic average. Market ignored comments from U.S. Treasury Secretary John Snow who told the U.S. Chamber of Commerce that a strong dollar is 'in the U.S. interest'. But he added that the value of the currency should be set in open markets.

Close to the weekend, the euro trimmed some of its gains on speculation that the European Central Bank (ECB) President Jean-Claude Trichet might warn against the recent rapid rise of the single currency during a news conference following ECB's monetary policy meeting.

However, the release of ECB president's statement had disappointed the market as it appeared relaxed about the euro's record-busting rally.
Trichet said that growing global demand should ease the impact of a less competitive exchange rate on European exports.

Meanwhile, ECB kept its interest rates unchanged at a historic low of 2 pct as market expected. On the last trading day, the euro jumped to all life high of 1.2868 against the dollar, as a stunningly small gain in U.S. payrolls fanned expectations that U.S. interest rates will remain low for some time.

The U.S. Labour Department reported non-farm payrolls added just 1,000 jobs in December, compared with market's forecast of 130,000 new jobs. The unemployment rate, however, fell to 5.7 pct from 5.9 pct in November.

Week ahead, market will be scrutinising a string of U.S. economic figures that will help to gauge the fundamental outlook of the growth in the U.S. Retails sales, the University of Michigan consumer sentiment survey, Inflation data and U.S. producer price are schedule to release next week. In otherwise quiet week on the other side of the Atlantic, with Germany releases its annual growth forecast for 2003.

Range for the week: $1.2600 - $1.3100.

Japanese Yen

The dollar began the week trading around 107 levels against the yen, with speculation of possible Japanese intervention.

Japanese officials continued to lash out against the yen's rally during the week. Japan's top financial diplomat, Zembei Mizoguchi stated that the Japanese authorities remained ready to step into the foreign exchange market if there was a danger of volatility.

Japanese Finance Minister Sadakazu Tanigaki also warned against the yen's recent rise, saying that the authorities would act against speculative or rapid move.

Moreover, Hiroshi Okuda, leader of Japan's biggest business lobby, mentioned that it was vital for Japanese companies exporting to the United States that the dollar stay above 105 yen.

Meanwhile, Ministry of Finance data showed that Japan sold about 20 trillion yen ($187 billion) in 2003 to stem an export-damaging rise in the
currency.

As the week progressed, the dollar scored to its highest levels against the yen in almost a month, to around 108.30 yen, after suspicion of aggressive yen selling by Japan to slow the pace of its export-choking rise.

According to the Nikkei's Nihon Keizai Shimbun, Japan spent 4 trillion yen (about $38 billion) on yen-selling intervention so far in 2004, broadly in line with traders' estimates. Japan's Ministry of Finance, however, did not confirm any intervention.

Range for the week: 105.00 - 110.00

Sterling

The sterling hit a new 11-year high of $1.80 levels on broadly weak dollar and expectations of UK interest rates hike.

Bank of England already raised its interest rates by a quarter-point to 3.75 pct in last November and the market is pricing in another hike early this year. Expectations for higher rates were underpinned by report from mortgage lenders Halifax showing the strongest rise in house prices
since February and strong retail sales data.

Halifax said house prices rose a seasonally-adjusted 1.8 pct in December, putting them 15.4 pct higher than year earlier.

Meanwhile, the Confederation of British Industry said retail sales for the first three weeks of December were sharply higher than in the same period in 2002 with the balance rising to +33 in December from +19 in November.

Bank of England, as expected, left its interest rates unchanged at 3.75 pct during its first MPC meeting in 2004. Meanwhile, the pound shrugged off news of a slightly worse than forecast November British trade deficit as markets continued to see the Bank of England in rate hike mode even though it kept borrowing costs steady.

Britain's trade deficit with the rest of the world widened unexpectedly to 4.41 billion pounds in November from 4.25 billion.

Range for the week: $1.8200 - $1.8700