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20 Jun 2005

K-Social

Against the yen, the $ hovered within a range of 108-109 yen, attributable to rumors that China would hold press conference on a possible revaluation

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Last week, the $ strengthened against the euro amid an environment of low European interest rates fueled a wave of euro selling. The yen derived some gains from speculation that China will soon reform its exchange rate regime. Meanwhile, sterling softened on the possibility of an interest rate cut in Britain. Gold, on the other hand, hit a three-month high above $440 per ounce and was seen nearing a 2005 peak.

The $ started the week somewhat higher despite news of a record US current account deficit. The US current account shortfall for the first quarter amounted to $195.1 billion or 6.4% of GDP, and was wider than the $190 billion forecast by economists. Worries about the US current account gap had been the biggest driver of a 30% decline in the dollar index in the three years to the end of 2004. The $ was supported early by heavy euro selling after Reuters reported that euro zone central bank policy makers are waiting for more data before deciding whether an interest rate cut is justified.

The potential for lower interest rates to boost the euro zone's flagging economy once again highlighted the euro's low-yielding status, and added to the political jitters stoked by European Union leaders' failure to agree on a long term budget. After French and Dutch voters rejected a proposed constitution in their respective referendum, the sharpened focus on Europe's political tensions sparked the rounds of euro selling.

The greenback gained further amid market speculation European interest rates is headed lower. An unexpectedly large cut in Swedish interest rates caused some market players to conclude that a trimming of the ECB rate might not be far behind. Sweden's Riksbank eased by a bigger-than-expected 0.50%, taking its rates to a new low of 1.50%. Besides, news from the Bank of England of some rate cut sentiment also prompted more speculation the ECB will cut at some point. Minutes of the BOE's June meeting showed that two Monetary Policy Committee members voted for a rate cut, including the Bank's chief economist.

Thus, the euro slid further late in the week versus the $, weighed down by growing expectations that European interest rates would move below those in the United States. Also, the single currency fell against the yen as a fresh wave of speculation over a revaluation of the yuan prompted yen buying and euro selling.

Against the yen, the $ hovered within a range of 108-109 yen, attributable to rumors that China would hold press conference on a possible revaluation of its yuan currency. Buying the yen is often considered a proxy trade for betting on a Chinese currency revaluation. China has been urged to allow the yuan to trade more freely, a move many think will help redress global imbalances. But the president of the Bank of China, one of China's four main state-controlled banks, said a revaluation of the yuan was unlikely to happen soon. Late in the week, the yen was underpinned once again by news that Beijing's tightly controlled foreign exchange regime will likely be discussed when Chinese President Hu Jintao participates in the G8 summit in Scotland.

The $ rose to $1.2043 per euro on June 23 from $1.2146 per euro on June 20. Against the yen, the greenback eased to 108.88 yen on June 23 from 109.35 yen on June 20.

As for the UK currency, sterling was rather steady last week against the $ and rose versus a weaker euro. Talk of falling rates in the euro zone underscored sterling's interest rate advantage over the euro. British interest rates stand at 4.75% compared with 2.0% for the single currency bloc. The pound was sluggish against the $ due mainly to a report that the BOE's two policy makers voted for lower UK interest rates, boosting expectations of a future rate cut. Sterling dipped to $1.8153 on June 23 from $1.8244 on June 20.

On the bullion market, gold surged above $440 an ounce despite a tumbling euro. The precious metal was supported by continued worries over the European Union's stability and fears of higher oil prices. Gold climbed to $442.20 an ounce on June 23 from $438.50 an ounce on June 20.


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