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3 Oct 2005

K-Social

As for the UK currency, sterling sank early last week on a drop in house prices in E

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Last week, the US dollar gathered its strong momentum at the beginning of the week due to US economic data and hawkish comments from Federal Reserve officials. However, the greenback gave up its gains as the euro rebounded rapidly amid bullish sentiment on Germany's political situation. Meanwhile, sterling shrugged off news that the Bank of England left UK interest rate unchanged. Gold, on the other hand, firmed on the heavy buying due to worries about inflation and geo-political crisis.

The $ continued to strengthen early last week, hitting a 16-month high against the yen and three-month peaks against the euro, with market sentiment on the currency still decidedly bullish. With a slew of solid US economic data and recent hawkish comments from Federal Reserve officials, investors bet on more interest rate increases by the Fed, which should enhance the allure of some dollar-denominated assets such as short-term deposits. The Institute for Supply Management index of national factory activity rose 59.4 in September from 53.6 in August, exceeding economists' median forecast for a drop to 52.0. The prices paid component jumped to 78.0 from 62.5, which raised concerns about inflation and the likelihood of further increases in US interest rates to contain it. Manufacturers have not hesitated to increase production after Hurricane Katrina that caused damage in Louisiana, Mississippi and Alabama in late August. Besides, the $ also posted solid gains due to reports that the Chicago Purchasing Management Index jumped to 60.5 in September from 49.2 in August.

The $ stood firmly after a Federal Reserve official joined the hawkish chorus on US interest rates. Atlanta Fed President Jack Guynn told Reuters in an interview that the Fed's tightening campaign still has a ways to go. Other Fed officials also weighed in on the need for more inflation-fighting rate rises, with both Dallas Fed President Richard Fisher and Philadelhia Fed President Anthony Santomero speaking on the economic outlook.

Noticeably, the greenback rallied versus the yen, boosted largely by a disappointing tankan survey of corporate sentiment in Japan. The Bank of Japan's quarterly tankan survey of business confidence was plus 19 for September, slightly below financial markets' expectations for a reading of 20.

In the middle of the week, the $ retreated mildly, reversing some of gains in partly technical trading, after US data showed growth in services sector slowed sharply last month. The Institute for Supply Management's services index fell to 53.3 in September from 65.0 in August. The service sector constitutes about 80% of the US economy, and includes diverse areas such as hair salons, restauratnts, hotels and airlines.

The $ tumbled further late in the week because investors turned to buy back the euro amid moves toward forming a coalition in Germany and signs of an uptick in economic activity in the euro zone in September. Chancellor Gerhard Schroder of Germany and his Christian Democrat rival, Angela Merkel, were to meet to decide who will lead Germany, after elections last month produced an impasse. Signs of a European uptick came from service industries that grew at the fastest pace since July 2004 during September, while manufacturing expanded at the most in seven months. German business confidence unexpectedly rose to an eigh-month high. Also bolstering the single currency was news that Venezuela's central bank might invest in the euro as well as the Chinese yuan and Japanese yen, to diversify its dollar reserves.

The $ slid to $1.2183 per euro on October 6 from $1.1915 per euro on October 3. Against the yen, the $ weakened to 113.25 yen on October 6 from 114.20 yen on October 3.

As for the UK currency, sterling sank early last week on a drop in house prices in England and Wales. Recent British data have been on the weak side, raising expectations the Bank of England might cut interest rates again after its easing in August. But the pound crept up later on positive signs about the outlook for UK manufacturing. British manufacturing activity expanded at its fastest pace in six months in September. Late in the week, the UK unit rose further versus the $ as the latter fell suddenly on the euro's upturn. Meanwhile, the pound eased against the euro on news of steady UK rates and weak output data. British industrial output unexpectedly fell at its sharpest pace in five months in August. Sterling recovered to $1.7790 on October 6 from $1.7552 on October 3.

On the bullion market, gold prices softened last week on a stronger dollar. However, gold's sentiment was still extremely bullish as a result of robust physical demand and fears of inflation. Physical buying in India surges in the festival season that peaks in November. Demand in the Middle East, another big consumer, should also pick up at lower price levels. Bomb attacks in Indonesia could attract some investors towards gold's allure as a safe-haven asset. Gold surged sharply late in the week as the $ plunged to a two week low versus the euro. Gold climbed to $472.10 an ounce on October 6 from $466.30 an ounce on October 3.

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