Business | Markets
Dollar rebounds after grim euro zone economic data
Greenback should continue to recover, but the party may end after Fed's interest rate decision and poor non-farm payroll figures.
- Special to Gulf News
- Published: 00:45 April 27, 2008
Dubai: The dollar started the week supported by Citigroup's results. The bank showed writedowns of $6 billion against much worse market rumours. Meanwhile, the Bank of America became the latest victim of subprime-related losses.
It reported a 77 per cent drop in net income as provisions for credit losses hit $6 billion. In order to raise capital, the bank has been forced to sell part of its highly lucrative stake in China's Construction Bank.
Fed fund futures are currently pricing in an 82 per cent chance of a quarter point rate cut this week with the remaining 18 per cent probability in favour of no rate cut at all. This is a sharp departure from just a week ago when the market was pricing in a 76 per cent chance of a 25 basis points cut and a 24 per cent chance of a 50-point cut.
The reason for this dramatic shift in expectations is increased inflationary pressure. The dollar should continue to recover for the rest of the week, but the party may end after Federal Reserve interest rate decision and non-farm payrolls due for release.
Euro
The dollar weakened against the euro on Monday, due to rising inflationary pressures, which had sparked speculation that the next move by the European Central Bank (ECB) may be a rate hike instead of a rate cut. Even though economic data has been slowly deteriorating, the fact that price growth is well above the ECB's target level is making the central bank increasingly uncomfortable.
The euro hit an all-time high above $1.60 against the dollar on Tuesday as surging oil prices and hawkish rhetoric from ECB policymakers overshadowed earlier concerns about the European banking sector.
The euro had retreated further on Wednesday from a record high against the dollar after comments from European policymakers indicating that the weaker dollar is hurting euro zone growth. The euro continued to depreciate on Thursday, after disappointing results from the German Ifo survey. An ECB policymaker also said he saw no need to raise interest rates.
Range for previous week: $1.5650-$1.5950 (Dh5.7483- Dh5.8584).
Range for this week: $1.5553-$1.6018 (Dh5.7142- Dh5.8850).
Yen
The yen commenced the week appreciating against dollar, as investors continued to unwind their carry trade positions.
Japan's Tertiary Industry Index fell more than expected, with major spending declines in the real estate sector, followed by deterioration in the financial and insurance sectors.
In contrast, Japan's leading Economic Index and Coincident Index figures came in strong for the first time in seven months.
By the end of the week, the dollar rose around 0.3 per cent against the yen to 104.61 yen, hitting a two-month high as markets start pricing in the possibility of the US interest rates staying on hold.
Range for previous week: 102 yen to 105 yen (Dh0.03498- Dh0.036009)
Range for this week: 102.65 yen to 104.81 yen (Dh0.035044-Dh0.035792).
Sterling
The pound fell with markets unimpressed by the Bank of England's announcement that it plans to swap £50 billion worth of UK bonds for mortgage securities to add liquidity to the lending market.
The latest monetary policy meeting failed to provide any clarity on how the central bank may vote on a rate cut because the committee was split on the issue.
Sterling ended the week higher despite news of a bigger than expected monthly fall in March retail sales, and ended at a three-week high against the euro, driven by position adjustment and increasing concerns about the health of the euro zone economy.
Range for previous week: $1.9800-$2.0100 (Dh7.2725- Dh7.3827).
Range for this week: $1.9675-$2.0027 (Dh7.2286- Dh7.3580).
- HSBC Global Markets Middle East
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