Sterling's fortunes hinge on BoE's inflation report

Dubai: The dollar was hit by two hefty interest rate cuts by the Federal Reserve within days, along with fears of a US recession and the potential for more US financial firms to suffer credit losses from problems at bond insurers.

Data last week showed that the economy expanded at a mere 0.6 per cent in the fourth quarter, and that jobs were shed in December for the first time in over four years.

But some investors argue that the grim news on the US has now been factored in - Fed funds futures expect at least another 75 basis points of Fed rate cuts this year to fight off recession.

The focus, therefore, is switching to other econ-omies, the prospect of economic spillover and the implications for rates relative to the dollar going forward.

Euro

The dollar started the week bouncing back against major currencies as investors believed that the ECB will have to follow the BoE and Federal Reserve in cutting rates, which would eat away at the euro's yield advantage over the US currency.

Stock market moves have been a big driver for currencies, as investors see equity market performance as a barometer of risk. Rising stock markets tend to benefit higher-yielding currencies at the expense of lower-yielding ones. The ECB held interest rates at four per cent as expected, brushing off calls to help avert a sharp worldwide economic slowdown by cutting borrowing costs.

But the bank's president, Jean Claude Trichet, dropped a threat to act preemptively against rising prices and accepted that unusually high uncertainty in markets may hurt the euro zone economy.

The euro was down two per cent on the week, the largest weekly decline in one and a half years, and was seen weakening more in coming days on growing expectations the ECB will cut interest rates later this year, even with persistent inflation pressures.

Last week's range: $1.4650-$1.4950 (Dh5.3809- Dh5.4911.

Range for this week: $1.4440-$1.4850 (Dh5.3038- Dh5.4544).

Yen

The yen weakened broadly on Monday as a rally in global equity markets signalled a tentative recovery in risk appetite, while the dollar steadied against a basket of major currencies. The yen gained against the dollar and euro on Wednesday as a steep sell-off in Asian equity markets hurt risk appetite and reduced demand for carry trades.

The yen edged up slightly by the end of the week on caution over investors possibly rushing back into the Japanese currency if a stock market slide prompts a reversal of carry trades.

Last week's range: 105 yen-108 yen (Dh0.034009- Dh0.034981).

Range for this week: 105.89 yen-107.81 yen (Dh0.034060- Dh0.034687).

Sterling

The British pound commenced the week on a weak note versus the dollar and eased against the euro as investors positioned for a widely-expected BoE interest rate cut by the end of the week.

The BoE lowered its key rate by a quarter percentage point to 5.25 per cent, following a similar cut in December to help shore up the economy but policymakers remain worried about inflation, dampening hopes of rapid fire rate cuts.

Sterling extended losses versus the dollar on Thursday after UK industrial output data came in weaker than expected. UK manufacturing output fell 0.2 per cent on the month after a 0.1 per cent fall in Nov-ember while analysts had forecast a 0.1 per cent gain.

The BoE's quarterly inflation report will take centre-stage this week with many economists expecting it to downgrade its growth forecast for this year.

Last week's range: £1.9500-£1.9800 (Dh7.1623- Dh7.2725).

Range for this week: £1.9380-£1.9790 (Dh7.1200- Dh7.2690).