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14 Mar 2005

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As for the UK currency, sterling softened early on the $'s recovery and remarks by Bank of England governor Rachel Lomax that the central bank kept interest rates steady in February partly because

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Last week, the $ remained largely vulnerable to worries over US current account deficit, higher oil prices and fears that central banks would begin diversifying their reserves away from the dollar. But the greenback gained some support from some investors who bought back into the US Treasuries. Meanwhile, sterling failed to rise further after the $ recovered on heavy buying late in the week. Gold, on the other hand, hovered as a result of the dollar's movement and new record oil prices.

The $ recouped some of its losses early last week as investors bought the greenback on the view that sell-off on poor US trade data may have been overdone. Besides, speculative investors took profits in other currencies, driving the dollar higher. The $ also rose against the yen despite of upward revision to Japanese growth data. Japan's GDP for the last quarter of 2004 was revised up to show growth of 0.1% from an initial 0.1% contraction. Adding to the yen's losses was selling from Japanese investors and importers versus both the dollar and the euro, as well as option-players and speculators wanting to lock in profits. The currency market showed limited reaction to a statement by Chinese Premier Wen Jiabao that Beijing could spring a surprise on markets in deciding when and how it reforms its currency. China joins a growing number of Asian countries that are exploring ways to diversify their massive forex holdings and invest in unconventional assets from infrastructure to oil.

The $ inched up slightly further as a report showed robust foreign net purchases of US assets in January. The number offset the nation's wide monthly trade deficit. The US Treasury's international capital flows data showed the United States attracted net capital inflows of $91.5 billion in January, well above a revised $60.7 billion in December. The total was more than enough to cover January's $58.3 billion trade deficit and supported investor confidence that current account deficit would continue to be financed by foreign central banks and other investors.

In the middle of the week, the $ turned lower, depressed by news of US current account gap and oil prices. The current account deficit widened more than expected in the fourth quarter to a record $187.9 billion, driving the full year gap to a new high of $665.9 billion. The quarterly deficit overshot Wall Street expectations of $181.9 billion. That news was enough to turn investors away from the dollar, then US crude futures jumped more than $1 to a record high around $56.46 a barrel, adding to investor aversion for the US currency. Also hurting the $'s sentiment was concerns over currency diversification by some central banks. Lately, Ukraine's economy minister, Serhiy Teriokhin, added to the chorus of global voices on the theme when he said he wants to diversify the country's foreign exchange reserves of around $10 billion and that the euro should comprise at least 25% of the total.

In addition, the euro also benefited from media reports suggesting the European Central Bank could well hike interest rates by September. Meanwhile, the yen also rose against the $ due to the Bank of Japan upgrading its assessment of the economy slightly even as it kept monetary policy unchanged.

The $, however, strengthened late in the week on sell-off in emerging markets that sent investors into US Treasuries. The hot money flew back to US Treasuries because of emerging market liquidations. The $'s gains were limited later by the Philadelphia Federal Reserve's business activity report. The index fell to 11.4 in March from 23.9 in February. The details of the index were also generally soft, particularly the employment and prices paid components. Besides, surging oil prices also helped cap the $'s upside.

The $ slipped to $1.3417 per euro on March 16 from $1.3373 per euro on March 14, before edging up to $1.33.81 per euro on March 17. Against the yen, the $ was quoted at 104.92 and 104.55 yen on March 14 and 17, respectively.

As for the UK currency, sterling softened early on the $'s recovery and remarks by Bank of England governor Rachel Lomax that the central bank kept interest rates steady in February partly because it paid heed to the downside risks to its forecasts. However, the pound climbed higher at the dollar's expense and British Finance Minister Gordon Brown's statement on UK budget. Brown set the stage for a May general election in his budget speech, boasting the under his stewardship, Britain had seen the longest period of economic growth since records began in 1701. Despite a rise of British retail sales on February, the pound lost its power late in the week on the $'s broad-based recovery. The UK retail sales increased 1.2% as expected. Sterling was traded around $1.9251 on March 17 from $1.9139 on March 14.

On the bullion market, gold came under pressure early last week as the dollar fought back. But the precious metal rebounded later after the $ turned sharply lower following huge US current account deficit in the fourth quarter of 2004. Unfortunately, gold sank below $440 an ounce late in the week on the $'s rebound triggered by sell-off in emerging market debt and buying back US Treasuries. Also, gold failed to draw much support from crude oil prices scaling new highs above $57 a barrel. Gold was traded around $442.05 an ounce on March 14 and $439.25 an ounce on March 17.

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