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Euro pares gains after tough talk on rate hikes
The euro touched a two-month high against the dollar last week, but fell sharply after the European Central Bank (ECB) interest rate meeting reduced expectations of further euro zone interest rate increases.
- Agencies
- Published: 23:14 July 5, 2008
Dubai: The euro touched a two-month high against the dollar last week, but fell sharply after the European Central Bank (ECB) interest rate meeting reduced expectations of further euro zone interest rate increases.
This week's focus will be the Group of Eight (G8) summit and whether the leaders will send a message strong enough to reverse the course of record high oil prices and the dollar's overall fall.
Markets will also keenly await the Bank of England's (BoE) rate decision due on Thursday.
Euro
The euro commenced the week on a strong note, supported by market expectations of an ECB interest rate rise by 25 basis points to 4.25 per cent at its policy meeting later in the week, and possibly further beyond that.
The expectations were cemented by data showing that euro zone consumer prices jumped to a record high four per cent in June, double the ECB's two per cent target.
Markets took the view that US economic weakness and worries about the financial sector will prevent the Federal Reserve from raising interest rates, current at two per cent, in the near future.
The dollar was further hit after the release of a private report by ADP Employer Services which showed that US employers slashed 79,000 jobs in June, the largest drop since November 2002.
More fuel for euro hawks came from euro zone producer prices which were above forecast at 7.1 per cent year-on-year in May.
As the week ended, the euro, however, hit a one-week low against the dollar after the ECB signalled that it was not planning another rate rise in the near future, and the US jobs data did not deliver a big downside surprise.
The ECB raised the interest rates to 4.25 per cent as widely expected, but ECB President Trichet said that he had no bias on monetary policy, knocking the euro two US cents off the two-month highs.
Trichet also said that the current level of interest rates would help contribute to achieving the bank's price stability goal.
Markets interpreted this as the ECB's latest rate hike being a one-off event and that further rate rises will depend on the incoming economic data.
Range for previous week: $1.5651-$1.5909 (Dh5.7486- Dh5.8434). Range for this week: $1.5500-$1.5800 (Dh5.6932-Dh5.8033).
Yen
The yen rose against the dollar at the start of the week on the release of closely watched Bank of Japan (BoJ) tankan survey which showed a smaller-thanexpected decline in Japanese business sentiment.
Its impact, though, was shortlived as data still showed that confidence among big Japanese manufacturers fell to a five-year low and did little to alter market expectations that the BoJ would hold interest rates at 0.5 per cent for a while.
In other news of interest, oil continued to touch new highs on renewed fears of supply falling short of demand, and increased tensions between Israel and Iran, the world's fourth largest oil exporter. Oil has rallied about 50 per cent since the start of this year.
Range for previous week: 104.97 yen-106.92 yen (Dh0.034353-Dh0.034991). Range for this week: 105 yen-108 yen (Dh0.034009- Dh0.034981).
Sterling
Sterling commenced the week on a high note, touching a two-month high just above the $2 mark against the greenback.
It was, however, knocked off after tumbling UK housing shares and a shock profit warning from retailer Marks & Spencer cast a shadow over Britain's already slowing economy.
Sterling fell further after UK services PMI came in weaker than expected, indicating that the dominant services sector shrank for the second consecutive month in June at its sharpest rate since October 2001.
This week, all eyes will be on the BoE's policy meeting on Thursday.
Market expectations are for the central bank to keep rates unchanged at five per cent as it grapples with the twin threats of slowing economic growth and rising price pressures.
Range for previous week: $1.9793-$2.0006 (Dh7.2700 -Dh 7.3482). Range for this week: $1.9600-$1.9900 (Dh7.1991-Dh7.3093).
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