Dollar tests multi-month highs

Guru Greenspan will hold the key in the coming week, as his testimony to the senate banking committee will be scrutinised closely for any hint of an end to the 'measured' pace of rate hikes or the 'accommodative' policy adopted by the US Federal Reserve.

Euro

The euro started the week on a lack-lustre footing after coming under pressure towards the end of the previous week on comments from Fed chairman Alan Greenspan, who provided an upbeat assessment of the US current account deficit helping the dollar recoup.

The G7 group of industrialised nations which met over the weekend offered no major surprises as they issued the usual statement concerning currencies, reiterating their desire for more flexibility and less volatility in the foreign exchange market.

Meanwhile, comments from China, who said that they were committed to revaluing the yuan, provided modest support to the dollar, although failure by China to mention a time frame kept a check on the dollar's gains.

A proposal by US president George W. Bush to reduce the budget deficit to 1.7 pct of GDP by year 2008, from the current 3.5 pct of GDP triggered a fresh wave of dollar-buying, as market players took heart from the administration's efforts to reign in the huge deficit.

The euro reeled in the face of the resurgent dollar, as it dipped to $ 1.2732; a three - month low, but worries over the actuals crept in putting a halt to the dollar's gains.

With the market having exhausted itself with building fresh dollar long positions, focus shifted to the release of the US trade balance for December, largely seen as a reason for the dollar's recent weakness.

The figure offered little reason for rejoicing and came in at USD 56.4 Billion against an expected USD 57.0 Billion, whilst the November number was also revised lower to USD 59.3 Billion.

However, the dollar failed to gain any support from the data as the annualised number recorded a 24 pct increase to reach USD 617.7 Billion in 2004, raising concerns over the United States' ability to trim the deficit in a short span of time. As worries over the deficits resurfaced, the greenback slipped allowing the euro a hasty comeback to $ 1.2900 levels.

Market players are likely to be on their toes next week, as Greenspan delivers his semi-annual testimony before the Senate Banking committee, with speculation rife on a drop of the Fed's words 'measured' and 'accommodative' following 150bps of rate hikes since June 2004.

In addition, the release of US retail sales, industrial production and capital inflow data will also have its' say on the dollar's trend in the coming week.

Range for this week: $1.2780-$1.3080

Japanese Yen

The Japanese yen opened it's account on a weaker note, after China failed to offer any specific date for a revaluation of the yuan, only mentioning that it was still being considered by policy makers.

Failure by the G7 finance ministers to offer any new statement on currency moves failed to have an impact on the yen, which traded close to 105.00 yen per dollar - a one-month high created in early January.

As the week progressed, the greenback gathered momentum as it continued to derive support from comments by Fed chairman Greenspan and also from the unveiling of the latest budget plans by President Bush, as markets pondered on the possibility of a halving in the record deficit.

The yen, which held firm for most of the week, finally gave way as the break of technical barriers above 105.80 levels brought in the bears, eventually resulting in a massive collapse which saw it test a three-moth low of 106.86 per dollar.

However, the release of the US trade balance for December and the eventual annualised US trade deficit of USD 617.7 Billion proved too much for the greenback to handle as it allowed the yen to regain almost all lost ground and settle around 105.60.

The release of the Japanese current account balance for December, consumer confidence for January, GDP for 4Q '04 and a Bank of Japan meeting to decide on monetary policy will be key events in the Japanese economic calendar next week.

Range for this week: 103.30-106.30

Sterling

With England having lost the six nations Rugby opener to Wales in Cardiff after 12 years, Sterling commenced the session on a sombre note as absence of key UK data left the currency vulnerable to movements against the broadly stronger US dollar.

With analysts expecting the release of UK data to be mixed, Sterling lost ground against a resurgent greenback, falling below $ 1.8600 - hitting a 2 ½ half month low of $ 1.8512.

The crash came mainly as a result of dollar cheers brought about by an upbeat assessment of the US economy by Fed chairman Greenspan and an optimistic budget plan by President Bush.

The release of stronger-than-expected UK trade and manufacturing data added some support to the currency and helped it regain its footing. The UK trade deficit narrowed to GBP 4.43 Billion in December from 4.71 Billion in November, against expectations of a wider reading of GBP 4.8 Billion.

The decision by the Bank of England to keep interest rates unchanged at 4.75 pct, offered little reaction as the release of the US trade balance across the Atlantic took centre stage, and pushed the pound lower to a new 11-week low of $ 1.8510.

However, the dollar's joy was short-lived, as a closer look at the US trade deficit brought about a reversal in fortunes for the greenback, which gave up most of its gains.

Range for this week: $1.8550-$1.8850