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28 Mar 2005

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As for the UK currency, sterling increased gradually due early to reports that monthly data showed British mortgage approvals had

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Last week, the $ remained within the narrow ranges against most major currencies due partly to US economic data and signals of a possible acceleration in interest rate hikes. Meanwhile, sterling shrugged off a weak industry survey and poor house prices. Gold still tracked currency moves, with an eye on key US data.

The $ recovered early last week amid quiet trading on Easter holidays. The greenback rose to a five-month high against the yen and edged up to six-week peak versus the euro, helped by continuing bullishness on the US economy and expectations of a proactive Federal Reserve on raising interest rates. After its policy meeting, the Fed noted a pick-up in inflation, causing the market to price in higher interest rates and strengthens the dollar. Higher US interest rates tend to support the dollar since they make returns on short-dated dollar-denominated debt more attractive to global investors. Most market players expect the US central bank to keep raising the benchmark federal funds rate, with some forecasting a rise to around 4% by the end of 2005, from the current 2.75%. In the meantime, the $ also benefited from the yen's weakness following a higher jobless rate in Japan and a fall in household spending, as well as a 1.6% drop in Tokyo stocks.

However, the $ eased later after a report showing a slight decline in US consumer confidence in March encouraged traders to take profits on recent gains. The index dipped to 102.4 in March from an upwardly revised 104.4 in February. Also weighing on the $ was the weaker-than-expected final reading of US economic growth and US inflation for the quarter. US GDP grew at an annualized pace of 3.8% in the fourth quarter, down from 4.0% in the third quarter of 2004. Besides, the price deflator, a measure of inflation, rose to 2.3% in the fourth quarter, above expectations of a flat reading of 2.1%. Higher inflation pressures could force the Fed to raise rates sharply, crimping US economic growth, potentially depressing bond and stock prices and diminishing the attraction of these dollar-denominated assets.

Late in the week, the $ faltered as a robust manufacturing index in the Midwest failed to fuel expectations of more aggressive interest rate hikes by the Federal Reserve. The National Association of Purchasing Management-Chicago business barometer rose to a 17-year high of 69.2. The $ remained sluggish ahead of the March US employment report due on April 1.

The $ inched down to $1.2966 per euro on March 31 from $1.2898 per euro on March 28. Against the yen, the $ was traded around 107.09 yen and 107.13 yen on March 28 and 31, respectively.

As for the UK currency, sterling increased gradually due early to reports that monthly data showed British mortgage approvals had picked up in February. Despite poor UK house prices in March, the pound managed to rise further on the $'s slide. The Nationwide Building Society data also showed the slowest rise in house prices year-on-year since June 2001 at 7.9%. Sterling climbed to $1.8904 on March 31 from $1.8662 on March 28.

On the bullion market, gold prices had sank below $430 after the US Federal Reserve hiked interest rates for the seventh time in a year on March 22, which hoisted the $ sharply later. However, gold recovered after the $ lost some of its gains as a result of poor US final GDP data in the fourth quarter of 2004. Noticeably, gold paid little heed to European Central Bank sales and remarks by the IMF and US government on possible selling of IMF gold. A dollar downturn after the release of US inflation data for February was more influential. Gold rebounded to $428 an ounce on March 31 from $426.90 an ounce on March 29.

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