Expect higher British interest rate (page 1 of 2)

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.