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10 Jan 2005

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As for the UK currency, sterling remained weak on concerns that Britain's interest rates have

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Generally, the $ weakened last week on poor US economic data, especially US trade deficit. But the greenback's downturn was cushioned partly ahead of the G7 meeting in early February in London. The yen rose on worries over any move by China to allow the yuan to appreciate. Meanwhile, sterling hovered as a result of UK economic figures and expectation of UK interest rates. Gold, on the other hand, remained soft due mainly to recent dollar strength.

The $ showed signs of flagging early last week after a week-long rally lifted it more than five cents from December's record low against the euro. The traders took some profit taking ahead of US trade data to be released on January 12. Earlier, dollar bulls were cheered by US Treasury Secretary John Snow's comments in a series of television and radio interviews saying the United States wanted to do things, including cutting its budget deficit, to support the currency strength. This raised talk the US President George W. Bush could introduce substantial cuts in the 2006 budget and diminish a key negative for the long-suffering US currency, which hit seven-week highs against the euro, Swiss franc and British pound late previous week.

Also weighing on the greenback versus the yen was statements by European Central Bank official that Asian currencies should bear more of the burden of the $'s broad weakness. Many Asian countries, most notably China, have kept their currencies artificially weak against the dollar during the $'s three year decline, which has been particularly sharp against the euro. But if China loosens the peg of the yuan, that should bolster other Asian units such as the yen against the $ as well. A break of the yuan's current peg with the dollar is expected to make Japanese exports more competitive and boost underlying support for the yen. Besides, the $ was also undermined versus the euro by reports that the ZEW research institute's expectations indicator rose to 26.9 in January from 14.1 in December.

In the middle of the week, the $ fell steeply as news of a much wider-than-expected US trade deficit fueled a sell-off. The US trade gap ballooned to a record $60.3 billion in November, defying Wall Street's view it would narrow to $54 billion. The November data highlighted structural economic imbalances that have trapped the dollar in the three-year decline and threatened to keep pressing the currency lower, especially given the size of the latest record deficit.

Noticeably, US Treasury Secretary John Snow, speaking in New York, tried to put a positive spin on the record trade gap, saying that the gap resulted from higher disposable income in the United States that let consumers buy foreign goods. Snow also said that Europe and Japan will have to pick up their pace of growth to help correct the massive US trade gap. His comments, unfortunately, had marginal impact on the market.

The $, nevertheless, inched up slightly late in the week on some profit taking following comments by the European Central Bank's top official urging Asia to adopt more flexible foreign exchange regimes. At a press conference after the ECB left interest rates on hold, ECB President Jean-Claude Trichet said the consensus within the G7 was for an orderly appreciation of Asian emerging market currencies. His comments pushed the euro weaker against the yen and dragged the single currency lower versus the dollar as well. The upcoming G7 meeting in early February in London is a major focus for currency investors. The $'s gains were limited by poor US December retail sales data and jobless claims.

The $ softened to $1.3224 per euro and 102.41 yen on January 13 from $1.3083 per euro and 104.36 yen on January 10.

As for the UK currency, sterling remained weak on concerns that Britain's interest rates have peaked although an upbeat report on the housing market from the country's largest mortgage lender Halifax helped support the pound earlier. Moreover, the British unit was also depressed after UK data showed December retail sales dropped at their fastest annual pace in nearly two years. The figures fell 0.4% on the year last month, their worst year-on-year performance since March 2003.

Sterling, however, rebounded in the middle of the week on the $'s slide following US trade deficit data in November. Meanwhile, a narrowing UK trade gap helped the pound.

The pound turned weaker later as poor UK data encouraged speculation the Bank of England may cut interest rates later in the year. Britain's central bank kept rates unchanged at 4.75% on January 13. The British factory output, which accounts for just over 17% of the economy, contracted by 0.1% in November. Sterling rose to $1.8915 on January 12 from $1.8756 on January 10 before retreating at $1.8831 on January 13.

On the bullion market, gold started the week somewhat firmer due mainly to the $'s sour sentiment. The metal's recovery gathered the momentum in the middle of the week, fueled by a surprise swelling of the US trade deficit. The trade data served as a remainder of fundamental seasons behind the dollar's bear run, supporting the case of traditional safe-haven assets such as gold. The precious metal cooled off slightly late in the week as the $ edged up against the euro on profit taking. Gold rebounded to $427.10 an ounce on January 12 from $420.50 an ounce on January 10. Then, it eased to $424.40 an ounce on January 13.

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