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31 Oct 2005

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As for the UK currency, sterling gave up its gains early last week after data from the consultancy Gfk Martin Hamblin showed UK consumer confidence decline unexpectedly in October to its lowest since March 2003. Besides, the pound's rate adv

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Last week, the $ firmed thanks to a combination of relatively contained US core inflation, solid growth data and prospects for higher interest rates. The yen was one of the biggest victims of the focus on interest rate differentials because Japanese interest rates are virtually zero. Meanwhile, sterling benefited from upbeat UK economic data. Gold, on the other hand, slid on the $'s strength and falling oil prices.

The $ started the week substantially higher versus the yen, hitting a 25-month high of 116 yen/dollar, due to robust US economic reports. US third quarter GDP rose 3.8%, outpacing analysts' forecasts for a 3.6% growth, although details of the data were distorted by the effects of hurricanes Katrina and Rita. A measure of core inflation held steady in September while a regional economic index showed a surprise uptick in October. The core POE price index rose 2% on a year-over-year basis in September, matching August's increase. The National Association of Purchasing Management's index of Midwest manufacturing activity rose to 62.9 in October from 60.5 in September. The data supported expectations that the Federal Reserve would keep raising rates. The dollar's growing yield advantage over the euro and the yen has been key to its rally this year.

Noticeably, the $ edged higher against the yen but slipped against the euro on November 1 after the Federal Reserve raised interest rates again, as expected, and signaled no end in sight to its inflation-curbing campaign. The Fed lifted rates by a 0.25% for the 12th consecutive time, to 4%, bringing the accumulative rate increases to 3% since the central bank began tightening monetary policy in June 2004. Despite signs of a sustained economic recovery and the Bank of Japan's own steps toward scrapping its ultra-loose monetary policy, the yen suffered the most because Japanese rates were not seen rising much from zero for a while.

In the middle of the week, the $ remained weak versus the single currency amid speculation the European Central Bank could signal at a meeting on November 3 that it intended to tighten monetary policy after 2-1/2 years of steady interest rates. In the past several weeks, hawkish comments from ECB officials in the face of sluggish economic growth have caused the market to price in more than a 50% chance that the euro zone central bank will raise rates in December from their current 2%. Higher interest rates could increase the attraction of euro zone assets in the near term.

The greenback, however, recouped its losses later, helped by hawkish comments by Federal Reserve chairman Alan Greenspan. The Fed chief made no specific monetary policy reference in what likely were his last remarks to Congress before his retires. But he repeated a warning on long-term inflation, echoing concern cited by Fed policy-makers during the 16-month long rate rising campaign. That contrasted with comments from Trichet who maintained that euro zone rates were still appropriate. Interest rate markets had begun to price in the possibility that the ECB would tighten rates in December for the first time in 2-1/2 years. But the ECB held rate steady at a policy meeting on November 3 and gave no indication a change. Also supporting the $ was a stronger-than-expected October surge in the mammoth US service sector from a post-hurricane slide and higher-than-forecast productivity figures for the third quarter.

The $ was traded around $1.1991 per euro & 116.39 yen on October 31, compared with $1.1949 per euro & 117.15 yen on November 3.

As for the UK currency, sterling gave up its gains early last week after data from the consultancy Gfk Martin Hamblin showed UK consumer confidence decline unexpectedly in October to its lowest since March 2003. Besides, the pound's rate advantage over the dollar and the euro could be further eroded, with the Fed and ECB both raising the rates. However, the British unit recovered slightly on reports that UK house prices rose to the highest level for the first time in 15 months. The Nationwide building society said that house prices rose 1.3% in October, taking up the annual rate of increase to 3.3%, the first rise in its property inflation rate this year. The figures dent expectations for an UK interest rate cut. The pound also benefited versus the euro from news that Spain's Telefonica SA would buy British mobile phone firm for 17.7 billion pounds. Late in the week, the British currency was also underpinned by news that UK service sector grew at its fastest pace in three months in October. Sterling was quoted at $1.7703 and $1.7708 on October 31 and November 3.

On the bullion market, gold prices softened as a firmer dollar triggered fund selling and more speculative selling. A lack of physical demand from India, the world's biggest gold consumer, was also weighing on sentiment. As did weaker oil prices. Crude oil fell to below $60 a barrel. Gold lost some of its allure for investors as an inflation hedge and as an alternative currency when oil price surged. Also depressing the precious metal was news of the Fed's interest rate hike and a stronger dollar. Gold fell to $461.30 an ounce on November 3 from $470.40 an ounce on October 31.

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