Confidence in dollar still weak as rate cut looms

Dubai: Confidence in the dollar remains low and investors fear more Federal Reserve interest rate cuts will make matters worse by swelling inflation and undermining long-term US economic health.

The Fed's rush to trim interest rates contrasts with that of the European Central Bank, which has held interest steady at four per cent. The Fed has cut benchmark rates from 5.25 per cent to three per cent since September, and the central bank's chairman Ben Bernanke has signalled he would reduce them further to boost the economy.

Euro

The dollar's slide to lifetime lows against the euro prompted verbal intervention by euro zone finance ministers with the backing of European Central Bank President Jean-Claude Trichet earlier in the week.

Trichet held no news conference but did his bit to suggest there were limits to acceptable dollar weakness. While finance ministers raised the tone of their complaints, saying exchange rates were no longer in line with economic reality, there was no mention of any direct central bank intervention to influence currency markets.

After sinking to a low of 1.5275 to the euro at one stage, the dollar recouped some losses after the initial declarations out of Brussels as well as US economic data that was less dire than anticipated. Helping halt the dollar's slide was news that that the Institute for Supply and Management's index of US national factory activity fell to 48.3 in February from 50.7 in January. Analysts said the reading meant an aggressive interest rate cut at the March 18 meeting could not be ruled out.

Fed policymakers voiced conflicting views on the outlook for inflation and growth, exposing a split among US central bankers that could influence interest rate moves. Signs of sluggish consumer and business spending and the potential for a deeper housing downturn pose risks to the outlook, Fed Board Governor Frederic Mishkin said. The slumping US service sector and a weakening job market dealt further blows to the economy.

The service sector is crucial since it accounts for about 80 per cent of US economic activity. Both services indices saw their biggest monthly falls ever in January.

The last trading session, witnessed the euro dip against the dollar after testing record highs, as investors locked profits on gains made following a drop in US non-farm payrolls for a second straight month.

The euro peaked at a high of $1.5459, following the jobs data. The Labour department on Friday said 63,000 non-farm jobs were eliminated on top of an upwardly revised loss of 22,000 in January.

The dollar rallied against the euro soon after an announcement by the Fed to inject $100 billion into the banking system as an emergency measure to ease liquidity strains that are leading to a global credit freeze. The dollar rebounded from record lows as the liquidity moves ignited speculation the Fed might be more restrained in cutting interest rates.

The bank has already cut rates by 2.25 percentage points since mid-September and another cut is widely expected when its policy team meets on March 18.

Range for previous week: $1.5145 -$1.5459 (Dh5.5627- Dh5.6780)

Range for this week: $1.5200-$1.5500 (Dh5.5832- Dh5.6931)

Yen

Tokyo put forward deputy central bank Governor Toshiro Muto on Friday as the next head of the Bank of Japan, raising the prospects of a showdown with an opposition wary of close government ties. A political wrangle over the nomination has dented the government's credibility and raised concern about a policy vacuum in the midst of global market turmoil once current BoJ governor Toshihiko Fukui retires in 12 days.

The dollar struggled versus the yen after Bernanke gave a grim assessment of the US housing sector, adding to mounting fears of a recession in the United States.

The dollar slipped further on Friday, testing 101.44 levels against the yen, before gaining ground to trade flat at 102.75 yen.

Range last week: 102.65 to 104.18 yen (Dh0.035256 to Dh0.035781)

Range for this week: 101.00 yen-104.00 yen (Dh0.035317-Dh0.036366)

Sterling

The British pound rose above $2 for the first time this year on Thursday, after the Bank of England left benchmark interest rates unchanged at 5.25 per cent, disappointing minority expectations for a cut.

However expectations are rife that the central bank may trim rates again by the middle of the year to shore up an economy buffeted by the global credit crunch.

The pound has gained more than four per cent against the dollar in the last three weeks as market expectations of easing from the Fed have grown.

In the coming week, investors will watch industrial production and producer price index data for further clues on the timing of the next rate cut from the Bank of England.

Range for previous week: $1.9720-$2.0216 (Dh7.2431- Dh7.4253)

Range for this week: $2.0100-$2.0400 (Dh7.3827- Dh7.4929).