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14 Feb 2005

K-Social

As for the UK currency, sterling strengthened early last week after UK prod

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Last week, the $ surrendered gains after comments from Federal Reserve Chairman Alan Greenspan provided no new impetus to buy the currency. The yen's sentiment was weak due partly to Japan's GDP data. Meanwhile, sterling rebounded on strong UK retail sales in January. Gold, on the other hand, recovered on the $'s decline and tensions over the nuclear ambitions of Iran and North Korea.

The $ started the week somewhat lower as the dollar's failure to break key technical barriers set off a wave of short-covering in other currencies. Dollar buyers ran out of energy once the US unit could not pass through $1.2750 per euro and 106 yen. Dollar selling also gained momentum after Japan's current account surplus grew 35.1% in December from a year earlier to a record 1.616 trillion yen. This was far higher than the forecast 4.5% rise. The data underlined the argument for a weaker dollar, particularly after news that the US trade deficit widened to a record $617.7 billion in 2004, swelling 25% from the year earlier. Also supporting the yen versus the $ was report that Ministry of Finance's data showed foreign investors bought a net 2.7 trillion yen ($25.61 billion) of Japanese bonds and stocks in January.

Adding to the pressure on the greenback was news that President George W. Bush recalled the US ambassador to Syria for urgent consultations following the killing of former Lebanese Prime Minister Rafik al-Hariri in Beirut. The $ had a bad day since the currency was already under siege despite reports that US December net capital inflows were 61.3 billion, higher than the $56.4 billion US trade deficit in December. Besides, the $ failed to gain from news that Euro zone growth tumbled to 0.2% in the fourth quarter, well below expectations of 0.4%. .

In the middle of the week, the $ continued to fall as Federal Reserve Alan Greenspan signaled further increases in US interest rates but offered no clues on their pace or timing at his testimony to the Senate Banking Committee. In a prepared statement, Greenspan said the US economy is expanding at healthy pace and that despite rate hikes by the Fed, the real federal funds rate remains fairly low. His testimony provided no surprises and investors began discounting the possibility that Greenspan would say anything dollar positive.

As expected, comments from Federal Reserve Alan Greenspan, in a second day of congressional testimony, provided no new impetus to buy the $. Thus, the greenback still softened despite strong US economic data late in the week. The Philadelphia Federal Reserve's business activity index rose to a better-than-expected 23.9 in February, while US initial jobless claims fell to the lowest level since October 2000. Greenspan reiterated that US interest rates remain fairly low, a signal to many they will keep rising.

Also, the $ slipped against the euro and Swiss franc after an Iranian report saying an aircraft had fired a missile near the southern city of Dailam in the province of Bushehr where Iran has a nuclear power plant. An array of explanations emerged later, ranging from construction of a dam to a fuel tank that had fallen from a plant. The Iran news overshadowed robust US housing start numbers for January and a report that showed US industrial production was flat in the same month.

Noticeably, the yen was barely moved on report that Japan's real GDP declined 0.1% in October-December and revised figures showed it also shrank in the two previous quarters. It is the country's fourth recession in a decade.

The $ eased to $1.3072 per euro on February 17 from $1.2971 per euro on February 14. Against the yen, the $ was traded around 105.16 and 105.54 yen on February 14 and 17, respectively.

As for the UK currency, sterling strengthened early last week after UK producer price data raised hopes of a potential currency-supporting increase in interest rates. British raw material costs rose at their fastest pace in more than four years. Unfortunately, the pound dipped later as the Bank of England said in a quarterly report that risks to inflation and growth projections were somewhat to the downside. These comments signaled it was in no hurry to raise interest rates.

However, the pound rebounded late in the week due to news that UK retail sale rose 0.9% in January after a 1.1% monthly fall in December. Sterling edged up to $1.8946 on February 17 from $1.8886 on February 14.

On the bullion market, gold prices recovered last week on the weaker dollar. A lower dollar makes dollar priced precious metals more affordable for non-US buyers. Besides, geopolitical issues also played a role in attracting investors to gold as a safe haven, with increasing concerns over the Korea peninsula and tensions between the United States and Iran over Tehran's nuclear ambitions. Also boosting the metal was an apparent lack of broad support for proposed sales of gold held by the IMF to finance Third World debt relief. Late in the week, gold gained further after the $ failed to draw support from two days of congressional testimony by US Fed Chairman Alan Greenspan. Gold rose to $427.50 an ounce on February 17 from $424.25 an ounce on February 14.

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