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Dollar scales new peaks

DUBAI: In a spectacular move the dollar scaled new heights and reached a 14-month high of 1.5070 against the deutschemark and a 26-month high of 108.99 against the yen.

Expectations of an imminent easing in German interest rates have been the main catalyst behind the greenback's upmove.

Meanwhile, recent robust US economic data hinted at rising inflation and suggested interest rates may remain steady in the near future. The dollar has also received a helping hand from talks (albeit premature) of a rising interest rate scenario in the US.

The dollar's robust performance in the past week coupled with overwhelming bullish sentiment may pave the way for a further upmove next week.

Dollar/deutschemark: Currency dealings were quiet on Monday with most European and some Asian offices closed for the Easter holiday. Indications that the US economy was on the recovery path with prospects of steady US interest rates in the months ahead helped the dollar leap upwards.

A report showing German unemployment rose 26,000 in March pointed towards a slow-down in the German economy and increased speculation that German interest rates would be lowered soon. This was further endorsed by comments from Bundesbank president Hans Tietmeyer and chief economist Otmar Issing. While Tietmeyer reiterated his view that the Bundesbank was still examining the scope for further easing, Issing remarked that there was no justification for a rate rise in Germany at present and the next move in rates would more likely be down. The future trend of German interest rates have played a key role in determining the mark's performance against the dollar in the past week.

The deutschemark was also hit by optimism about the European Monetary Union and prospects of a single EU currency. The possibility that the mark would be replaced by a less credible single European unit after the EMU in 1999 has hurt confidence in the German currency.

The outcome of a meeting of European leaders to discuss the exchange rate agreements over the weekend is likely to have an impact on the dollar/mark.

Bundesbank Council members meet next on April 18 at their regular meeting which will be followed by a news conference. Most dealers are of the view that besides announcing results of its 1995 performance, the council may also announce a reduction in the Lombard and discount rates.

In the coming week the dollar is likely to trade between 1.4850-15200 marks.

Japanese yen: Escalating tension between North and South Korea coupled with large purchases of the Australian dollar related to a dual currency samurai bond issue triggered aggressive yen sales.

Furthermore dollar/yen remained well bid after Japan's Ministry of Finance director Eisuke Sakakibara urged Japanese institutions to increase holdings of foreign assets.

Japan's February current account surplus had little impact as it was in line with market expectations. The surplus shrank to 745 billion yen in February from 1.22 trillion yen.

With the US economy showing strong signs of recovery, the dollar is likely to continue its upward trend against the yen. Next week, the greenback is expected to remain firm and possibly creep towards the 110.00 target.

Sterling: The pound touched a fresh low of $1.5040 when stops were triggered by fund selling in a thin New York market. The inevitable outcome of Thursday's by-election causing political jitter added to the pound's slide.

Important economic data from the UK next week include March producer price index, unemployment and retail sales.

In the next week the pound may trade between $1.4970 - $15320.

Australian & Canadian dollar: Japanese investors have aggressively been buying AUD related to a dual-currency samurai bond issue.

AUD has been creeping upwards since the start of the year, and has tested a five-year high of 0.7927 this week. Buying interest is expected to continue, but we feel the Australian unit should encounter resistance at 0.7980 in the coming week.

CAD has strengthened over the past few weeks, and further gains are possible in the coming days.