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28 Feb 2005

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As for the UK currency, sterling started the week sharply higher due to growing expectations the Bank of England might soon raise interest rates. Housing market survey, consumer credit and policymakers helped

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Last week, the $ enjoyed modest gains as investors focused on the potential for rising US interest rates and on relatively weak European data. The yen derived some support from favorable data, raising hopes that economy may be pulling out of last year's slump. Meanwhile, sterling hit its highest level against the dollar in 2005 on expectation of UK interest rate hikes. Gold, on the other hand, benefited early from the $'s weakness.

The $ softened early last week as traders took profits following recent gains and US data showed the economy grew slightly less in the fourth quarter than a Federal Reserve official had hinted. US fourth quarter GDP growth came in up 3.8% versus forecast of 4.0%. The $ was also pressured by US existing home sales data showing single family home sales fell 0.5% in January. Housing has been a pillar of US economic expansion.

Remarkably, the $ fell substantially against the yen after the release of stronger than expected economic data in Japan. Japanese industrial output rose 2.1% in January from a month earlier, above market expectations. Separate data showing retail sales grew last month at the fastest year on year pace since 1997 also encouraged views of a broad recovery. Also helping support the yen was reports that Bank of Japan Governor Toshihiko Fukui warned against assuming Japan's ultra-loose monetary policy would last indefinitely and by renewed speculation about a revaluation of the Chinese yuan. China's foreign exchange chief was quoted by state television, as saying the country would gradually open up its capital account in 2005, another step in its plan to make the yuan currency fully convertible.

However, the $ rebounded later, with negative factors keeping some rivals currencies down and paving the way for the dollar's upturn. In Europe, euro zone inflation rose at an annual rate of 2.0% in February from January 1.9%. The Swiss PMI fell to 47.9 in February from 52.2 in January, marking the first time since July 2003 the sector has contracted. Meanwhile, Australia's current account deficit widened to A$15.17 billion in the fourth quarter, a record and around 7% of GDP.

In the middle of the week, the greenback strengthened slightly on US Federal Reserve Chairman Alan Greenspan's remarks. In testimony to the US House of Representative Budget Committee, Greenspan said the economy is growing at a reasonably good pace but the country must tackle budget deficits by restraining spending. The US$ gained especially from the Australian economy's weakness following news of a 0.1% rise in Australia's fourth quarter 2004 GDP. Besides, the $ also rose versus the euro as the European Central Bank would cut its projection for euro zone growth in 2005 to a midpoint of 1.6%, down 0.3% from the rate expected three month ago.

Late in the week, the $ still benefited as strong US economic data reinforced market expectation monthly US employment report would show robust jobs growth. US business productivity expanded 2.1% in the fourth quarter, higher than market forecasts for a 1.5% increase. For 2004, as a whole, non-farm business productivity, or worker output per hour, grew 4.0%. US initial jobless claims, meanwhile, fell to 310,000 in the week ended Feb.26 from 311,000 the previous week.

Noticeably, the ECB left euro zone interest rates steady at 2% on March 3. The decision had little impact on the market.

The $ edged up to $1.3112 per euro on March 3 from $1.3235 on February 28. Against the yen, the $ was quoted at 104.62 yen and 105.28 yen on February 28 and March 3, respectively.

As for the UK currency, sterling started the week sharply higher due to growing expectations the Bank of England might soon raise interest rates. Housing market survey, consumer credit and policymakers helped boost expectations of UK interest rate hike from 4.75%, raising returns on already high-yielding sterling assets. But the pound eased slightly later on news that Britain's service sector grew at a slower pace in February as business confidence fell to its lowest in over a year. Sterling slipped to $1.9078 on March 3 from $1.9220 on February 28.

On the bullion market, gold hit briefly a 2005 high of $437.55 an ounce in London, bolstered by renewed weakness in the dollar and firm oil prices at the beginning of the week. Sentiment improved slightly for gold over the past couple of weeks after fears of gold sales by the IMF took the metal right down to $410 an ounce. Dollar weakness and inflation worries stoked partly by higher oil pushed gold higher, due to the metal's role as a classic “safe haven” investment. However, gold retreated later on the overall firmness of the dollar late in the week. Gold dipped to $431.10 an ounce on March 3 from $437.40 an ounce on February 28.

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