Expect higher British interest rate

Euro
Euro kicked off on a weaker note and traded a low of $ 1.2050, its lowest level for 2004, hurt by expectations that the European Central Bank may soon cut interest rates to support the bloc's fragile economic recovery. Soon after the key support levels were traded, speculators reversed the trend and bought back the euro. Doubts also started creeping into the market about whether the ECB is going to really cut rates or may be wait till May or June when the ECB would reassess its outlook if consumer demand does improve.

As the week progressed, US dollar traded towards the higher end of the well-defined range. Dollar shed some of its losses after US consumer confidence data eroded slightly for March after falling harder than expected in February as concerns over the labour market, rising gasoline prices and security weighed on consumers. The index fell to 88.3 in March from an upwardly revised 88.5 in February.

News of fire at a British Petroleum Plc refinery in Texas bolstered the euro particularly after the last week warning of a security threat by the FBI to refiners in that area. BP said the cause of the fire was unknown but added it did not appear to have been started intentionally.

Euro broke through the $ 1.2300 barrier after National Association of Purchasing Management-Chicago's barometer showed slower-than-expected expansion in March and a contraction in the employment index component. In other report, US factory orders rose 0.3 percent in February after falling a revised 0.9 percent in January. Adding fuel to the fire was a rumour (eventually denied) which flew around in the financial market that Federal Reserve Chairman Alan Greenspan had suffered a heart attack.

The euro chalked up a one-week high against the dollar as the European Central Bank spurned one opportunity to cut interest rates and gave no indication that it ever intends to do so.

The ECB's decision to hold rates at 2 per cent for a tenth straight month was widely expected, but doves at least hoped for a few crumbs of comfort at the ensuing press conference. Instead a hawkish Jean-Claude Trichet, president of the ECB, painted a picture of rising consumption, cautiously optimistic growth and firming inflation.

The purchasing managers' index (PMI) measure of eurozone manufacturing rose to 53.3 in March, its highest level since December 2000 and ahead of consensus forecasts. Crucially, higher export orders supported the view that the euro is not at problematic levels.

German retail sales were also a shade firmer than predicted in February. However the greenback recovered from intraday lows when the US ISM manufacturing index eclipsed expectations, with a bullish employment component raising spirits ahead of key non-farm payrolls data on Friday.

During the last trading session of the week, greenback rose sharply as market-watchers scrambled to bring forward their forecasts for a US rate hike in the wake of buoyant payroll numbers. The US created 308,000 jobs in March, well ahead of the consensus forecast of 120,000, and the fastest level of jobs growth since April 2000, with January and February numbers revised up by a combined 87,000.

Meanwhile, the jobless rate ticked up to 5.7 percent in March from 5.6 percent in the previous two months. Most chose to ignore the accompanying, and more downbeat, household survey, weak earnings data and a raft of one-off factors behind the headline number.

The money market priced in the likelihood of the US Federal Reserve raising rates from their historic lows of 1 per cent before November's presidential election. A rise in rate would be widely viewed by analysts as a bullish prospect for the dollar since it would increase the allure of dollar-denominated assets for foreign investors.

Range for the week: $1.1950 - $1.2450.

Japanese Yen
31st March is the fiscal year end for Japan and traditionally during this week dollar/yen trades lower due to funds repatriation for the year end book closing. Reports that Japan had ended its campaign to weaken its currency pushed the dollar lower in the beginning of the week.

The article, which quoted a Bank of Japan official and not the Finance Ministry which directs intervention, said that Japanese officials think that intervention is no longer necessary because the country's economic recovery is gathering strength.

Soon after the report, a senior official at the ministry reiterated that Tokyo would continue to intervene if needed and if market rates strayed from fundamentals. Recent raft of positive data on Japan's economy was helping fuel a rally in Japanese shares and increasing demand for the yen.

Currency market tested BoJ's resolve and drove dollar/yen below the key psychological barriers of 105.00 level (its lowest level in nearly four years), before it stalled on suspicions that the Bank of Japan was buying dollar to support their currency. Comments from Japan's Finance Minister Sadakazu Tanigaki that Japan had grown resilient to the stronger yen gave the currency another boost, lifting it to 103.45 to a dollar.

The closely watched quarterly 'tankan' survey by the Bank of Japan showed that more Japanese firms felt they were doing better in March than at any time in nearly seven years. The main diffusion index for big manufacturers came in at plus 12, the highest since June 1997 and the fourth straight quarter on improvement.

Among the upbeat figures in the tankan poll, many currency traders were struck by the average dollar/yen rate that Japanese companies expected for the new financial year. Large manufacturers forecast an average dollar rate of 108.43 yen in fiscal 2004/2005, versus the current level around 104.40. Analysts said that given recent yen strength most companies must have revised down the level and were concerned how it affected their earning outlook. Many analysts said that Japanese companies are capable of enduring a strong yen.

After the start of the new financial year it was business as usual with Japanese investors buying fresh foreign assets and thus driving the yen lower from its new 4-year high. Nevertheless, against a backdrop of an improving economy, large foreign buying of Japanese stocks, and an apparent scaling back of intervention by the Bank of Japan, analysts said it was only a matter of time before the Japanese currency resumed its climb. Japanese officials were upbeat about the country's economic recovery but denied speculation that the improvement had led to a change in their policy of resisting a rise in the yen.

Range for the week: 102.00 - 107.00

Sterling
Sterling traded with a firm footing as robust consumer credit and record mortgage lending data bolstered expectations for higher British interest rate. British mortgage lending rate rose to a record 14.5 percent year-on-year in February, suggesting Britons' appetite for debt had not been diminished by the last two Bank of England interest rate hikes.

However, Bank of England MPC member Stephen Nickell said that higher debt levels were natural given the strength of house prices. Housing data from the Nationwide building society said house prices rose 1.4- percent in March.

As the week progressed sterling moved higher on the back of weak US economic data and ECB's decision to hold euro interest rates steady, taking it to a new high of 1.8604, its highest level since early March. By the close of the week, sterling lost some of its shine due to robust US payroll numbers. The financial market will look forward to next week's Bank of England interest rate meeting; though economists predicted it would hold borrowing costs steady for the time being and gauge the situation.

Range for the week: $1.8000 - $1.8500