Dollar remains firm favourite

Dubai: The dollar was a hot favourite for most part of last week supported by steady gains in US stocks, rising US bond yields and on growing optimism that the worst of the credit crisis may be over.

Despite the encouraging headline figures, analysts are of the opinion that the European Central Bank will have no option but to cut interest rates in the second half of the year as the economy wilts, consumers worry over rising living costs and exporters struggle with the weight of a strong euro.

Euro

The dollar rose broadly at the start of the week, boosted by a change in investor risk appetite and on growing speculation that the current cycle of US interest rate cuts may be screeching to a halt. At the same time, mounting signs that European economic growth is stumbling has stirred speculation the European Central Bank could edge towards slashing interest rates. European Central Bank President Jean-Claude Trichet lent his weight to the debate when he confirmed the central bank's stance on inflation.

Trichet warned that surprisingly good euro zone growth at the start of the year would not last, but fellow policy makers said this did not mean the ECB could relax its guard on inflation.

A strong dollar theme continued for most part of the week, supported by unexpectedly strong retail sales, excluding automobiles, which further cem-ented the view that the Federal Reserve would probably not trim interest rates again next month. News that retail sales excluding the hard-pressed auto sector increased 0.5 per cent after a 0.4 per cent March pickup suggested that US consumers remained resilient despite the housing market rout.

The euro gained momentum after data released on Thursday brought superficially good news. First-quarter euro zone growth was better than expected, maintaining the 2.2 per cent annual rate achieved in the last three months of 2007, and April inflation was confirmed as easing to 3.3 per cent from March's record 3.6 per cent. However it erased most of its gains after Trichet once again reiterated that second-quarter growth in the single currency would be "less flattering".

Range for previous week: $1.5283-$1.5692 (Dh5.6134- Dh5.7636)

Range for this week: $1.5400-$1.5700 (Dh5.6565- Dh5.7670)

Yen

The Japanese yen started the week on a weak note, slipping against the US dollar on growing speculation that the Fed is going to take a pause from lowering interest rates and to start raising them later in the year as the central bank starts focusing on the threat from inflationary pressures.

On Thursday, the US dollar rose around 0.2 per cent against the yen near a two month high on signs that the worst of the credit crisis may be over, and after the boost in US stock markets encouraged investors to sell low yielding currencies like the yen to invest in higher yielding currencies and assets.

By the end of the week, the Japanese yen strengthened against US dollar after better than expected GDP data released on Friday showed the Japanese economy grew 0.8 per cent. This supported the expectation that the Bank of Japan will keep its stance on leaving interest rates as they are at least for a while.

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

Range for this week: 102.55 yen-105.44 yen (Dh0.034835-Dh0.035836)

Sterling

The pound started the week depreciating against the dollar as expectations increased that the Bank of England will cut interest rates during their upcoming meeting to combat economic weakness spilling over from the ongoing global credit crisis. This view was further strengthened on Thursday when Prime Minister Gordon Brown said that he hoped "the Bank of England would be able to cut interest rates further", sending the pound to a three month low of $1.9380.

By the end of the week the pound dipped against the euro as investors were worried by the combination of high inflation, after the Bank of England's quarterly report showed inflation was likely to stay above target for awhile. Market focus will be glued to the minutes from the Bank of England next Wednesday for further clues on the direction of UK interest rates.

Range for previous week: $1.9400-$1.9700 (Dh7.1256- Dh7.2358)

Range for this week: $1.9363-$1.9632 (Dh7.1120- Dh7.2128)