US dollar rides high on rate debate (page 2 of 2)

With market attention increasingly focussed upon the recovery of the US economy and the timing of the next interest rate hike in the United States, the Japanese yen continued to remain under pressure as it was pushed above 114.00 to a dollar by investors betting on higher US rates.

The midweek release of a record US trade deficit failed to lift the yen as market players retained their appetite for dollars, largely due to expectations for higher rates in the near term. Japanese first quarter GDP and current account figures due to be released in the coming week will be focused upon closely, whilst foreign profit-taking in the Nikkei is likely to add further pressure on the Japanese currency.

Range for the week: 112.50 - 115.50

Sterling

The British Pound remained under pressure at the onset of the week largely due to broad-based dollar strength and relied on movements in euro/dollar for direction.

News of a surprising fall in UK manufacturing data for March, added further pressure on Sterling as it cast doubts on the future of British interest rates - widely expected to stand at 5.0 pct by the end of 2004.

The data knocked Sterling lower towards a five-month low of $ 1.7530, but the release of an upbeat inflation report by the Bank of England the following day aided the currency to climb higher and erase most of its losses.

The Bank of England stated that price growth in the United Kingdom would move above the official target of 2.0 pct, and warned that inflation would still be a little above target in two years even if British interest rates rose in line with market expectations.

The report reinforced previous expectations of higher interest rates and pushed the currency higher, whilst separate data showing Britain's trade gap remained steady in March had little impact on the currency's fortunes.

Sterling will face a stern test of character in the week ahead as the release of UK inflation and retail sales data is likely to have an impact on expectations of higher rates.

In addition, the release of minutes from the Bank of England's Monetary Policy Committee meeting, where interest rates were raised by 25 bps is also likely to grab attention as investors are likely to continue their attempts at reading the minds of policy makers.

Range for the week: $1.7500 - $1.7800.