Citigroup tonic gives strength to dollar

The week was marked by euro touching a record high against the dollar on concerns about the health of US economy and financial markets triggered by announcement of emergency measures by the US Treasury and Federal Reserve to support embattled mortgage giants Fannie Mae and Freddie Mac.

In the coming week, markets will keep an eye on the German IFO business climate index and US durable goods orders.

Euro

The dollar commenced the week initially supported by announcements of US Treasury and Federal Reserve of emergency measures to restore investor confidence in Fannie Mae and Freddie Mac, which together directly or indirectly control almost half the US mortgage market.

It, however, fell to a record low against the euro as the markets later interpreted the support as indicating the extreme severity of the credit market problems.

With rising oil prices hurting US growth, there was little incentive seen to buy dollars. Concerns about the US economy and financial sector overshadowed a series-low reading of the German ZEW investor sentiment.

The dollar received some support from a fall in oil prices during the week, which eased some gloom over the US financial sector.

It was also supported by upbeat earnings from fifth-largest US bank Wells Fargo.

The US currency rise was, however, weakened on a news report that said that sovereign wealth funds were seeking to reduce their exposure to the US currency, highlighting a gradual shift away from the dollar that has been taking place over the past few years.

The euro rallied further on comments from a European Central Bank (ECB) policymaker that a slower economy would not reduce inflation and that if no action was taken, the euro zone would experience stagflation.

As the week closed, better-than-expected quarterly results from Citigroup Inc led to the dollar's rise against the euro.

Range for previous week: $1.5782-$1.6038 (Dh5.7967- Dh5.8908)

Range for this week: $1.5700-$1.6000 (Dh5.7666-Dh5.8768)

Yen

The Japanese yen started under pressure on account of Japanese investors continuing to be a source of funding for cash-strapped foreign borrowers given their appetite for higher returns on foreign assets.

The yen, however, struck a six-week high against the dollar on Tuesday in a 1.5 per cent rise - its highest one-day rise since the collapse of Bear Stearns on March 17 - on worries about the health of US economy and financial sector.

As the week closed, the dollar recovered against the yen on a rise in stock markets and fall in oil prices, which may have encouraged speculative traders to engage in risky carry trades funded by cheap borrowing in the Japanese currency.

Range for previous week: 103.75 yen-106.98 yen (Dh0.034334-Dh0.035402)

Range for this week: 105.00 yen-108.00 yen (Dh0.034009-Dh0.034981)

Sterling

Sterling commenced the week on a strong note supported by the Spanish bank Santander's £1.3 billion bid for British rival Alliance & Leicester, which acted to lift confidence in the UK banking sector.

Bank of England (BoE) policymaker Kate Barker was quoted as saying that policymakers need to be careful about keeping interest rates so high that the economy slows down too much, which was interpreted as an indication that a rate hike is unlikely soon.

Sterling hit a three-month month high against the dollar after data showed a bigger-than-expected jump in UK inflation to 3.8 per cent year-on-year last month, dampening any expectations of near-term interest rate cuts.

The British currency however fell after UK labour market data showed that the number of jobless Britons had jumped by its largest number since 1992.

Range for previous week: $1.9811-$2.0153 (Dh7.2766-Dh7.4022).

Range for this week: $1.9700-$2.0000 (Dh7.2358 -Dh7.3460).

HSBC Global Markets Middle East Limited