Signs of global slowdown boost dollar

Dubai: The US unit enjoyed a sharp rise over the last month as stuttering overseas economies sparked a rate-cut speculation frenzy while the Federal Reserve was regarded as holding interest rates steady for the time being.

Euro

Signs of broadening global slowdown have given the dollar a boost in the past month as investors have dumped the currencies of economies losing steam. The US unit rose to a six-month high against the euro as the single currency weakened on dim German GDP data, which raised concerns of recession in the euro zone and fuelled expectations of interest rate cuts.

The greenback extended its rally of the past month, touching a 2008 high against a basket of currencies on the view that economic weakness, once thought to be limited to the United States, is spreading globally. Figures from Germany exacerbated fears that the euro zone was inching towards recession while the European Central Bank maintains its hawkish stance by leaving interest rates unchanged.

While the markets are pricing in a 25 basis point rate cut by the second quarter next year, a relatively empty economic calendar leaves the currency vulnerable to short-term volatility.

The euro however, surged back from its six-month low against the dollar supported by comments from a European Central Bank official who rekindled speculation about an interest rate increase in the euro zone to quell persistent inflation pressure.

The recovery comes on the back of ECB executive board member Axel Weber's hawkish comments in which he scaled back on anticipation of the euro zone's rate cut, arguing that lowering interest rates was premature.

ECB vice president Lucas Papademos threw in his two cents, putting forward the case for a rate hike should the euro zone's high inflation set off a wage-price spiral. The dollar, meanwhile, retreated against a basket of currencies on fears that Russia may cut oil supplies to Western Europe.

The UK's Daily Telegraph reported Russia may restrict shipments in the coming days in response to the European Union's threat of sanctions over its military action in Georgia.

The final trading session saw the dollar display its best monthly rise in more than a decade as markets absorbed a slew of positive economic news for the week.

Sealing the dollar's gains was a report showing business activity in the US Midwest expanded at a far more robust rate than expected as new orders jumped. A separate report showing US consumer confidence rose to a five-month high in August.

The euro was resilient in the face of lower than expected euro zone inflation and sentiment indicators, as hawkish rhetoric from policy makers raised expectations for higher euro zone interest rates.

ECB member Klaus Liebscher echoed comments from other policymakers earlier in the week that inflation is too high. Still, as august comes to an end, the greenback is up 5.4 per cent against a basket of currencies, heading for its biggest monthly gain since January 1997.

Sentiment for the dollar is expected to remain bullish in the coming week.

Range for previous week: $1.4567-$1.4811 (Dh5.3505- Dh5.4403)

Range for this week: $1.4550-$1.4850 (Dh5.3442 to Dh5.4545)

Yen

The dollar dipped against the yen at the start of the week, pressured by sharp losses in the US equities market, as nagging credit worries prompted investors to trim risky trades. A steep fall in Lehman Brothers shares spooked currency investors and fuelled a sell-off in the dollar against the yen and Swiss franc, two currencies that gain in times of financial stress.

Meanwhile Bank of Japan's head warned that central banks should be careful about the negative effects from keeping an easy monetary policy for too long and downplayed concern about a lengthy economic contraction in Japan.

Range for previous week: 108.40 yen-110.28 yen (Dh0.033306-Dh0.033883)

Range for this week: 107.50 yen to 110.50 yen (Dh0.033239-Dh0.034167)

Sterling

Sterling breached its weakest level against a basket of currencies in nearly 12 years on Friday, hammered by a weak UK econ-omic backdrop that has intensified speculation of a cut in interest rates by year-end.

A slew of disappointing data, including a dramatic drop in UK house prices and retail sales, added to the view the economy is heading towards a recession. The Nationwide Building Society said UK house prices fell almost 2 per cent on the month in August to post their big-gest annual drop since 199..

Range for previous week: $1.8171-$1.8590 (Dh6.6742- Dh6.8281)

Range for this week: $1.8050-$1.8350 (Dh6.6297- Dh6.7400)