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19 Sep 2005

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As for the UK currency, sterling slid early after Bank of England policy market Stephen Nickell sai

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Last week, the $ hovered within the tight ranges against most major currencies as markets nervously waited to see if Hurricane Rita, which was heading for the coast of Texas, would damage the US economy and slow the pace of US interest rate rises. Meanwhile, sterling gave up its gains late in the week on weak UK data and talk of a large merger deal. Gold, on the other hand, surged sharply due mainly to strong oil prices and a lack of European central bank and producer selling.

The $ rose early last week after an inconclusive German election threatened a prolonged period of uncertainty and further delayed the implementation of structural reforms in Europe's biggest economy. Provisional results from German parliamentary elections showed the opposition conservatives under reform-minded Angela Merkel scored 35.2%, less than a point ahead of Chancellor Gerhard Schroeder's Social Democrats. Besides, North Korea's announcement that it would give up nuclear weapons also aided the $.

The American dollar edged up further as the Federal Reserve increased interest rates by a 0.25% on September 20, as expected, and appeared to leave the door open to further rate hikes. The prospect of rising US interest rates tends to help the dollar because higher yields boost the appeal of dollar-denominated deposits to foreign investors.

In the middle of the week, however, the $ sagged as markets feared a new hurricane could wreak as much damage in the United States as Katrina. Hurricane Rita strengthened into a Category 4 storm as it headed towards the oil and natural gas facilities in Texas. In late August, the devastation from Katrina triggered a fall in the dollar as oil prices soared. Meanwhile, higher interest rates failed to support the dollar after one member of the Federal Open Markets Committee voted against the latest hike.

Nevertheless, the $ rebounded later as speculation Hurricane Rita may not be as damaging as feared lent support to a currency already gaining ground on technical factors. The US National Hurricane Center said Rita had weakened slightly and may cut a swathe of destruction the US Gulf to oil installations and refineries.

The $ dipped to $1.2217 per euro on September 21 from $1.2140 per euro on September 19, before regaining to $1.2150 per euro on September 22. Against the yen, the greenback firmed at 111.52 yen and 111.76 yen on September 19 and 22, respectively.

As for the UK currency, sterling slid early after Bank of England policy market Stephen Nickell said there was a serious risk the British economy would not recover as strongly as the bank had forecast. Then, the future course of interest rates depended on whether that came to pass. However, the pound recouped its losses as the $ stumbled on fears of a new Hurricane. Also helping the UK unit was minutes from Bank of England Monetary Policy Committee that the meeting revealed a unanimous vote to hold rates steady.

Late in the week, sterling turned lower again amid talk UK oil firm BP would bid for Spanish company Repsol. The potential flow out of sterling into euros would likely weigh on the pound. As did news of weaker-than-expected British factory data. Sterling was traded around $1.8024 on September 19, compared with $1.7908 on September 22.

On the bullion market, gold rose sharply last week, trading within the ranges of $466-468 an ounce, as speculators continued to buy on the back of inflationary worries and uncertainty about the US economy. Gold peaked in 1988 at $488.92 and has not been over $500 since mid-December 1987. Some analysts are calling for gold to move back to such levels in 2006. Gold got a boost as oil rose rapidly with Tropical Storm Rita threatening to possibly hit Gulf refineries that were missed by Hurricane Katrina. Also stoking gold's rally were strong bullion demand and a lack of selling by European central banks, which have reached the annual limit of a five-year pact to cap sales. Gold was quoted at $468.90 an ounce and $467.0 an ounce on September 19 and 22, respectively.

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