US interest rates on the way up (page 1 of 2)

Oil continued to rally as it sprinted past $ 57 a barrel forcing the OPEC to announce a hike in output; although it had little impact on cooling down prices.

The Federal Open Market Committee of the US Federal Reserve meets next week with wide expectations of a 25bps hike in US interest rates, whilst the accompanying statement is likely to draw significant attention for signs of a change in the Fed's approach.

Euro

The euro started the week on a strong pedestal, benefiting from news of a widened reading of the US trade deficit released at the end of the previous week.

As markets awaited the release of US Capital inflow data to gauge how well the United States had fared in attracting foreign capital, the dollar traded within ranges seen since the end of the previous week.

The euro suffered a minor setback in the run up to the data release, as market optimism first ran high and then subsided just before the data, only to return after the number came in at a staggering $ 91.3 Billion, against expectations of $ 60 billion.

The data helped alleviate fears of the United States being unable to attract foreign capital and pushed the euro towards the lower end of the $ 1.3300 - 1.3400 range.

However, the mid-week release of US 4Q '04 current account deficit data, which showed a record $ 187.9 Billion against an expected $ 181.6 Billion put the brakes on any fresh dollar gains, helping the euro climb above $ 1.3400.

The data showed that the current account deficit stood at 6.3 pct of GDP on an annualised basis, giving rise to questions of the country's ability to cope with the twin deficits - currently running at record levels.

Meanwhile, an announcement by the world's largest carmaker - General Motors, warning that it saw a threat to its profits in 2005, triggered a sell-off in US stocks taking the Down and Nasdaq down by over 1 pct, and piling more agony on the greenback.

Oil prices, which reached a record level above $ 57 a barrel, were also seen to be hurting the dollar's long-term prospects although reaction was muted. An announcement by OPEC of an increase in output failed to help, as market players dismissed the hike as "insufficient" to meet increasing global demand.

As the week drew to a close, focus shifted towards the upcoming meeting of the US Federal Open Market Committee meeting slated for next week, with expectations sky-high for a hike of 25bps in the Fed's overnight lending rate. The Fed funds rate currently stands at 2.5 pct, following six increases since June 2004.

The Fed's policy statement that follows will also be watched closely for a change in it's "measured' language, as a pick up in economic activity and inflation is likely to be addressed with aggression from the US policy makers.

In addition, the release of US PPI and CPI for February may also have an impact on currency markets as any signs of a pick up in inflation may be interpreted as dollar positive due to its impact on interest rates.

Range for this week: $1.3200-$1.3500

Yen

The yen commenced the week on a defensive note, after coming under pressure early on following the release of data showing a narrowing in the Japanese current account surplus by 28.2 pct in January from a year earlier.

An upward revision to the country's GDP for the last quarter of 2004, failed to help the currency as the pick up was largely attributed to a rise in inventories, signalling weaker demand.