Business | Markets
Dollar trims early gains on fears of widening deficit
Volatility and risk aversion appeared to be increasing around world financial markets, so far, to the benefit of the dollar as investors seek safety in the world's foremost reserve currency.
- Special to Gulf News
- Published: 00:00 June 18, 2006
Volatility and risk aversion appeared to be increasing around world financial markets, so far, to the benefit of the dollar as investors seek safety in the world's foremost reserve currency.
Upbeat US economic data has cemented expectations for an increase in the benchmark overnight federal funds rate to 5.25 percent at the end of June and pushed chances for another hike in August to about 70 per cent.
Euro
The dollar commenced last week on a positive note against the euro after more Federal Reserve officials talked tough on fighting inflation, reinforcing expectations for further interest rate increases.
Cleveland Fed President Sandra Pianalto said that current core consumer prices exceeded her "comfort level" if sustained, driving home the message that the Fed will keep raising rates if necessary to keep inflationary pressures contained.
Dallas Fed President Richard Fisher said the central bank was experiencing "some angst" over inflation. They were the latest in a slew of Fed officials making clear their discomfort with current inflation levels, convincing investors that the Fed will lift rates for the 17th straight time to 5.25 percent at its meeting ending June 29.
The plunge in prices of gold, copper and stocks has prompted a wide variety of investors to pull out of positions and reassess what had seemed a rosy outlook for the global economy.
The greenback continued its uptrend boosted by stronger-than-expected US economic data which suggested interest rates could rise a few more times. A University of Michigan consumer sentiment survey showed a higher-than-expected reading while the US current account deficit came out narrower than forecast.
The dollar, however, pared some of its gains against the euro after slightly less hawkish comments from US Federal Reserve Governor Randall Kroszner. He told the Institute of International Bankers on Friday that inflation was under close scrutiny, but remained manageable.
A pause in the recent barrage of US economic indicators may give markets a reprieve this week, helping to stabilise after more than a month of turbulence.
In the eurozone, French consumer spending, preliminary German consumer price inflation and Italian consumer confidence figures could all shape expectations of how quickly the ECB will raise interest rates in the coming months.
Last week's range: $1.2528-$1.2675 (Dh4.6015 to Dh4.6555)
Range for this week: $1.2500-$1.2800 (Dh4.5912 to Dh4.7014)
Yen
The dollar held near seven-week highs of 115.40 levels against the Japanese yen as investors treaded cautiously after sharp sell-offs in global stock and commodities.
The yen however found some relief from selling of the US currency by Japanese exporters and a slight rebound in Tokyo's Nikkei stock average a day after the worst one-day percentage loss in two years.
The recent sharp fall in the Nikkei and the possibility of worsening business sentiment has caused some in the market to question their forecasts for when the Bank of Japan will raise interest rates from near zero.
Many in the market expect the central bank to lift rates by 0.25 percentage point in the third quarter, possibly as early as July.
Last week's range: 114.23 to 115.44 yen (Dh0.031817 to Dh0.032154).
Range for this week: 114.00 to 117.00 yen (Dh0.031393 to Dh0.032219)
Sterling
Sterling steadied after strong UK economic data last week heightened chances of an interest rate rise this year. Sterling hit a three-week high against the euro and rose more than half a per cent to a one-week high against the dollar, boosted by strong UK retail sales and weak US data on capital flows.
Meanwhile continued foreign interest in UK companies has also been supportive for sterling. Australia's Macquarie Bank proposed paying at least £2.58 billion ($4.75 billion) for Associated British Ports, the same level as a raised bid from a rival group led by US investment bank Goldman Sachs.
In the coming week, attention will centre on whether the Bank of England is getting any closer to raising rates after leaving them unchanged for the past 10 months.
Last week's range: $1.8314 -$1.8561 (Dh6.7267 Dh6.8175)
Range for this week: $1.8400-$1.8700 (Dh6.7583 Dh6.8685)
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