Will the ECB cut rates this week?

Euro

The US Dollar started the week on a positive note extending its gains as investors kept adjusting positions after aggressive selling in the recent months. However, once the euro touched the technical low, profit taking emerged and pushed the greenback lower again.

Federal Reserve Chairman Alan Greenspan was slated to make a few speeches during the course of the week. In the first speech he gave some fairly positive comments on the US economy, saying delinquencies had stabilised and that balance sheet were relatively in good shape.

Also, US Treasury Secretary John Snow pointed to recent economic gauges to bolster his stance that the US economy continues to rebound, even as critics worry about lacklustre job growth. He also reaffirmed his commitment to a strong dollar
policy.

As the week progressed, focus shifted back to well-worn concerns about US current account and budget deficits as well as prospect for US interest rate to stay low. Analyst say the dollar will remain under pressure as long as the US current account deficit continues to widen and US benchmark interest rates remain at 1 percent, the lowest since 1958.

On the economic front, US data for the week, was a mixed bag. Bad numbers on US consumer confidence sentiment dealt one more blow to the dollar bulls. The US Conference Board's measure of consumer confidence fell to 87.3 in February from 96.4 in January, this figure implies a growing disenchantment among US consumers with the
economy due to lack of new jobs.

In Europe, economic data were not very good as well. German Ifo index had it's first fall in 10 months. The Ifo institute said the drop in its closely watched index came at 96.4 for February compared to 97.5 in January.

The institute also said that this number sent a 'small warning signal' about the recovery and urged action to keep the euro's exchange rate 'under control'.

Markets shrugged off ECB data showing investment capital poured out of the euro zone in December at a much faster pace than in November. German Chancellor Gerhard Schroeder said that consumer confidence recovery showed his labour market and welfare reforms were finally bearing fruits.

Close to the end of the week, the greenback got a jump-start as German Chancellor Gerhard Schroeder suggested the ECB should cut interest rates. This coupled with Alan Greenspan's positive outlook on the US economy gave market players a chance to buy US dollars.

He said that most recent economic indicators suggested that US economy is off to a strong start in 2004, and prospects for sustaining the expansion in the period ahead are good.

A few hours before the close of business, the US dollar fell against the euro after a sharp fall in University of Michigan's consumer sentiment report for February. Also adding fuel to fire was a report by a prominent German research firm that discounted the prospects the ECB would cut interest rates next week.

Range for the week: $1.2300 - $1.2800

Yen

The week started with Japanese yen trading above 108.50 and verbal jaw boning from Bank of Japan's officials supporting the dollar.

Japan's top financial diplomat, Zembei Mizoguchi said that currency market was moving in the right direction in the context of foreign exchange rate stability over the medium term. Mizoguchi declined to comment on a report citing unnamed sources as saying the ECB and BoJ would be ready to intervene, if needed, to slow the dollars fall against the euro and yen.

Earlier in the month, the greenback had been trading in very tight ranges centred on Yen 105.3 as the Bank of Japan defended the dollar from falling below Yen105, a key level.

Month end data from the BoJ showed Japan spent Yen 3,342 Bio ($30 Bio) on intervention during February. While still more than much of its monthly spending last year, the amount was less than the record Yen 7,155 Bio the authorities spent in January.

However, in spite of the intervention, dollar gains remained limited by the sheer weight of investors positioning for further US weakness and by jittery Japanese exporters keen to use any slight improvement in the dollar's value against the yen to exchange their dollar earnings for yen, thus putting the exchange rate under further pressure.

By the end of the week, US dollar got a boost on remarks by International Monetary Fund Head Horst Koehler expressing understanding for Tokyo's massive currency intervention to curb the yen's rise.

Mizoguchi said it was in line with previous IMF thinking and that an economic recovery in Japan was important for global economy. Yen closed the week just a touch above 109.00 on the back of overall dollar weakness.

Range for the week: 105.50 - 110.50

Sterling

Sterling was boxed within its range as most of the action was focussed on the European single currency and the Japanese yen.

Market sentiments are that Bank of England would continue to raise interest rates this year, adding to already attractive UK yields. This sentiment received support from Bank of England's MPC member Kate Barker, who was quoted as saying that Britain's economic outlook was at its best in nearly a decade.

As the week progressed, sterling dropped against the US dollar on a broad rally sparked after Federal Reserve Chairman Alan Greenspan's positive outlook for the US economy.

Data out from Britain was mixed. Consumer confidence took a bigger than expected tumble in February, with the BoE's interest rate hike of early February taking its toll on consumers.

The Confederation of British Industry's industrial trends survey showed British factory orders improved in February to their best level in three years as a manufacturing recovery gathered pace.

Nationwide building society said British house prices surged at their fastest pace in nearly two years in February belying any notions the country's property boom is over.

Range for the week: $1.8350 - 1.8850