960422

Dollar sentiment firm

DUBAI: The Bundesbank eased monetary policy by announcing cuts of half a percent in both the Lombard and discount rates.

While talk of an interest rate cut in Germany has been circulating for some time, market participants were surprised by the timing and the size of the cut.

Although the greenback attempted to surge higher after this news, it failed to forge ahead of tough resistance at 1.5160 marks.

While positive sentiment for the dollar continues to prevail, the US currency appears to be having some difficulty in testing the market objective at 1.5300 marks.

A weekend meeting of the G7 and a host of economic data should provide increased momentum in the currency markets next week.

Deutschemark: Comments by Bundesbank President Hans Teitmeyer, that he would welcome a further normalisation of the mark's exchange rate, coupled with rising hopes of an interest rate cut in Germany in the near term helped the dollar rise to a 14-month high of 1.5136 marks.

In addition a weekend strategy session on European Monetary Union, where EU Ministers agreed on a new incarnation of the ERM which would loosely link countries whose currencies do not qualify for EMU to the single currency, saw the mark fall versus Italian lira, Spanish peseta and French franc.

Analysts stated that in times of uncertainty about the EMU investors had bought up the mark as a safe haven; however, as market perceptions grow that some from of EMU will come out along the Maastricht treaty guidelines, the demand for the German currency is likely to dry up.

The dollar continued to trade in a predictable pattern ahead of the Bundesbank meeting. A certain section of the market was confident that the German central bank would announce a quarter percent cut in interest rates. However some analysis cited the weakness in the bund market as a strong reason for the Bundesbank to postpone a cut.

Money supply and inflation outlook have been a prime consideration for the Bundesbank and many believed that the central bank may wish to wait for the release of the M3 report for March before announcing a change in monetary policy.

The Bundesbank however had different plans and at a news conference after their council meeting on Thursday, eased the discount rate and Lombard rates by half a percent each to 2.50 percent and 4.50 percent respectively.

The dollar rose on initial knee jerk reaction to this news but a steep rise in the yen against the mark and the dollar's inability to break above its 14-month high resulted in the US currency falling sharply to touch a low of 1.4935 marks. Moreover, the dollar was also hurt by sentiment that German interest rates, now at historic lows, may not go any lower.

The greenback rebounded sharply on the last trading day of the week and set a 14-month high against the mark at 1.5160. A more positive view of the German interest rate cut and an upcoming weekend of the G7, which is expected to welcome the dollar's recent gains, helped in the dollar's recovery. Traders reasoned that the Bundesbank had left its key money market rate, the repo rate unchanged and this left the room for the German central bank to manoeuvre interest rates lower.

In the coming week the dollar may trade between 1.4950-1.4300 marks.

Yen: Another hectic week for the dollar/yen. Early in the week the dollar rose sharply on news that an unnamed Treasury official had stated that the dollar/yen rate could soon reach 110.00 yen, a key psychological and technical level.

Around mid-week, the dollar fell when Bank of Japan governor Yasho Matsushita stated that prolonged easing of monetary policy was responsible for the "bubble economy" in the 1980s. Analysts stated this meant that the Japanese government would not continue to pursue a low interest rate monetary policy. The prospect of higher interest rates in Japan were encouraging investors to direct funds into Japan.

Rumours that US Deputy Secretary Lawrence Summers stated that the US government would tolerate a dollar rise to 110-115 yen saw the dollar rise to a high of 108.60 yen. Although these comments were subsequently denied the dollar continued to remain bid against the Japanese currency.

Towards the end of the week a sharp drop in the mark/yen cross, from a high of 71.94 to 70.97 yen, saw the dollar fall to a low of 106.70 yen. Interest rate differentials between Japan and Germany narrowed, to the advantage of the yen, and triggered technical stop/loss selling of marks and selling by hedge funds. The combination of these factors have contributed to the mark's slide and, in turn, the dollar's sharp drop against the yen.

The last trading day of the week saw the dollar recover ground to end the week on a slightly positive note.

In the coming week the dollar is likely to trade 106.50-110.00 yen.

Sterling: The pound remained confined to narrow ranges all week and made modest gains against the dollar and its European counterparts.

Although the pound is likely to remain firm in the next week, political concerns may resurface to unsettle the pound.

Key economic data from the UK in the coming week include UK March M4, Confederation of British Industry's April industrial survey, and February retail sales. These figures should provide further insights into the state of the UK economy.