Dollar pares gains against euro on poor US data

Dubai: This week will continue to see volatility in stock markets and unstable credit markets amid concern over the strength of the US economy.

Secondly, comments from Saudi Arabia indicate that the kingdom is keeping its monetary and foreign exchange policies unchanged.

Euro

Last week opened with thin trade. The dollar remained steady against the euro but soon lost ground on fears that a spike in oil prices could further slow the US economy and prompt the Federal Reserve to cut rates again.

European Central Bank Governing Council member Erkki Liikanen said euro zone growth would probably be below two per cent this year. Mid-week, the dollar had regained some footing after data showed US core inflation rose in January.

The Consumer Price Index climbed 4.3 per cent in the 12 months through January, while core prices which exclude food and energy items increased by 0.3 per cent in January. This is the strongest monthly rise since June 2006, after having gained 0.2 per cent in December.

The euro extended losses versus the greenback after a top German politician said the country's regional state-backed Landesbanks were in crisis. The comments added to an already risk averse mood in a market that is worried about the health of the global financial sector.

The greenback's rebound was capped by the release of minutes of the Federal Open Market Committee's January 29-30 policy meeting, which reflected that most officials saw risks to growth which weighs more on the downside.

The US 2008 growth forecast was also reduced to between 1.3 per cent and two per cent from a previous forecast of between 1.8 per cent and 2.5 per cent in November.

The week ended with the dollar under pressure, holding near two-week lows against a basket of currencies after US data showed a weak regional factory activity. The euro zone, however, reported strong service sector data.

Range for this week: $1.4680-$1.4980 (Dh5.3919- Dh5.5021).

Yen

A flagging US economy and slack domestic demand will curtail Japan's growth in coming quarters and a Bank of Japan interest rate hike is still a long way off, a Reuters poll indicated on Tuesday.

The poll of 52 economists showed Japan is expected to grow 1.6 per cent in the fiscal year ending in March.

Bank of Japan (BoJ) governor Toshihiko Fukui, speaking after the bank decided unanimously to keep the overnight call rate on hold at 0.5 per cent, said last week that the positive cycle is weakening somewhat although it remains basically intact.

Rising risks of a US slowdown also prompted the government to lower its assessment of the Jap-anese economy in February for the first time in 15 months.

However, Fukui, reiterated that the BoJ would not react hastily to short-term developments, saying monetary policy should be implemented in a way that minutes future economic swings.

The yen maintained a firm momentum for most part of the week, as investors moved away from risky carry trades after a brokerage downgrade of the top two US home-funding companies, Fannie Mae and Freddie Mac.

The yen is expected to remain underpinned, as global growth fears will prompt investors to unwind risky carry trades that are often financed with cheaply borrowed yen.

Range for this week: 105.60 yen-108.60 yen (Dh0.033821-Dh0.034782).

Sterling

Sterling slipped at the onset of the week, after Bank of England arch-dove David Blanchflower called for an aggressive half-point cut, when analysts had predicted that all nine members of the Monetary Policy Committee would vote in favour of a 25 basis point cut.

The pound was further wounded on news that the government plans to take Northern Rock into public ownership, which added to investor concerns about the UK financial sector, encouraging speculation that interest rates are set to fall further from the current 5.25 per cent.

Northern Rock has borrowed about £25 billion ($49 billion) from the BoE since the global credit crisis last year.

This overshadowed an otherwise supportive report from property website Rightmove that said asking prices for houses in England and Wales rose in the four weeks to February 9.

The website said asking prices for houses posted their first acceleration since October last year, rising by 5.8 per cent in February.

Fortunes changed and sterling was once again was back on track having rallied against the dollar on Thursday after stronger-than-expected UK retail sales dampened rate cut expectations. Sales grew 0.8 per cent on the month in January, their strongest growth in almost a year and far outstripping expectations for 0.2 per cent growth.

This week, UK consumer confidence data due for release on Friday is likely to be in focus.

Range for this week: $1.9520-$1.9820 (Dh7.1696- Dh7.2798).