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Dollar succumbs to profit-taking

The dollar flirted with the 1.5000 mark level but failed to capitalise on its gains and succumbed to heavy profit-taking.

While the Federal Reserve chose to leave its credit policy unchanged, the Bundesbank in an unexpected move, announced a half percent cut in both its discount and lombard rates.

A plethora of key economic data from the US this week should provide clues on the future direction of the forex market.

Deutschemark: At the beginning of the week, activity in the currency market was minimal as traders were cautious ahead of the Federal Open Market Committee meeting.

Although a large section of the market did not expect any change in Fed funds rate, the dollar remained confined to narrow ranges as traders remained wary about any surprise moves. With the Fed funds rate currently at 5.75 percent and the discount rate at 5.25 percent and recent economic data indicating a pick up in the American economy, analysts believed that the Fed may refrain from announcing a change in monetary policy.

In the meantime, speculation whether the Bundesbank may ease interest rates at their council meeting later in the week began to preoccupy the minds of currency players. Economic data from Germany supported the easing argument; West German June industrial orders dropped 1.7 percent from May and the German research institute Ifo stated that the industrial confidence index fell to 97.5 in July from 99.0 in June.

The Federal Reserve's decision to hold interest rates steady met with a muted reaction from the currency market. Attention soon shifted to the latest German money supply data which suggested that an easing was most likley. The dollar appreciated sharply versus the mark on news German M3 money supply contracted 0.4 percent in July, reversing a 0.4 percent rise in June. Comments by Bundesbank President Hans Tietmeyer, who stated that he could not exclude a German easing in the foreseeable future, convinced many in the market that an easing of interest rates was imminent.

A six basis point cut in German securities repurchase rate to 4.39 percent saw the dollar shoot up to a high of 1.4923 marks and come close to the six-month high of 1.4930 marks.

The greenback, however failed to breach past this level and ultimately got sold in disappointment. With the focus now solely on the Bundesbank council meeting some analysts began to suggest that the German Central bank may prefer to wait until next month's inflation and GDP data before announcing a cut in interest rates.

The Bundesbank however, had different plans in a bold move it announced a 50 basis point cut in the discount rate (3.5 percent from 4 percent) and the lombard rate (5.5 percent from 6 percent).

Interbank players immediately reacted to this news and bought the dollar up to a high of 1.4990 marks.

The brief dollar buying spree soon ran out of steam and expectations of the dollar breaching the crucial psychological resistance level of 1.5000 marks became a distant dream. Several waves of profit-taking coupled with a blow from the erratic Durable goods orders which fell 1.7 percent in July against expectations of a 0.8 percent rise saw the dollar fall by more than two pfennings, as stop-loss selling accelerated.

The last trading day of the week saw the dollar mostly confined to a narrow trading range. News that French Finance Minister Madeline had stepped down resulted in a spurt of activity in mark/Paris cross which spilled over to the dollar/mark.

With a battery of economic data including second quarter Real Gross Domestic Product and the Unemployment Report slated for release this week, activity in the foreign exchange markets is likely to be hectic.

Yen: It was a somewhat subdued week for the dollar/yen which remained trapped in a narrow range for most of the week. Early in the week, unwinding of long-dollar positions alongwith some amount of profit-taking resulted in the dollar falling close to 96.50 yen.

Around mid-week, expectations of hefty sales of yen for dollars following Argentina's issue of a 100 billion yen five-year Eurobond, saw the dollar recover some of its lost ground.

Concern about the dollar's stagnation for most of the week and its inability to trade higher without help from the central banks has led some analysts to believe that the greenback may succumb to selling pressure and fall below the strong support level of 95.00 yen.

Others, however, are confident that the dollar's upward trend is still intact and a test of 100 yen may still be on the cards.

Sterling: It was a muted week for the British pound which traded between small bands for most of the week. It fell sharply against the mark at the outset of the week on news of a widening of the UK's non-EU trade deficit to œ856 million in July from œ759 million in June.

The pound mostly tracked movements of the dollar and fell to a low of $1.5305 when the greenback strengthened early in the week. However, the dollar's diminishing value towards the end of the week saw the pound test a high of $1.5505.

The Confederation of British Industry lowered UK growth forecast for 1995 to 2.9 percent from 3.3 percent and stated that UK interest rates may rise by 50 basis points by the year end.