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Dollar records modest gains

In the past week, activity in the foreign exchange market has been mostly, range bound. Comments by Bank of Japan Governor Yassuo Matsushita sparked speculation that Japanese interest rates would increase in the near term.

While better than expected US jobs report confirmed to many in the market that the Federal Reserve would refrain from easing interest for some time to come. Thin liquidity prevented any major forex movements after the sell-off in the US bond market, however this week may witness hectic activity in the financial markets.

Mark: Renewed expectations that the Bundesbank would ease interest at the next council meeting this month saw the dollar trade with a firm bias at the outset of the week.

US Napm index rose to 46.8 percent in March from 45.2 percent in February while US construction spending figures plunged 0.9 percent, the biggest drop since May 95. although these figures were at odds with market expectations no major reaction was observed in the currency market.

In a market hit by low volumes and minimal activity the dollar recorded modest gains against the mark.

The release of fresh economic data from the US failed to inspire any movements as currency traders preferred to wait ahead of the release of the employment report.

US leading indicators for February increased 1.3 percent after falling 0.5 percent in January, the largest rise in 20 years. The gross domestic product however, showed a less encouraging picture with the fourth quarter figure revised down to a final 0.5 percent from an initial estimate of 0.9 percent.

The approach of the week-end saw several foreign markets closed on account of Easter holidays and trading came to a virtual standstill.

Squaring of positions ahead of the holidays saw the dollar lose some of its strength. The last trading day of the week was mostly abbreviated and many traders were nervous as the previous employment report had shown that the economy created a hefty 705,000 non-farm payroll jobs in February. The Labour Department reported non-farm payrolls climbed 140,000 in March, after a revised gain of 624,000 in February.

The dollar surged to a high of 1.4850 marks on this news but failed to scale any higher due to selling pressure and technical resistance. Heavy selling in the US bond markets, the benchmark 30 year bond fell by more than two points, did not have a spiralling reaction on the currency market as many markets were closed for holidays.

The unemployment report silenced speculation that the Federal Reserve may ease interest rates in the coming months. If US stocks and bonds keep failing the dollar may head lower in the coming weeks.

The dollar is likely to trade between 1,4500 - 1.5000 marks this week.

Yen: A volatile week for the dollar/yen which dominated market activity all week. A high of 107.70 yen was reached early in the week on renewed concern about the Japanese banking system. News that US authorities were investigating the New York Trust Unit of the Long-term Credit Bank of Japan saw heavy buying of dollars for yen.

Confidence in the Japanese banking industry was shaken as this news came after last Friday's liquidation of the regional Taiheiyo bank.

Around mid-week rumours that another Japanese bank was facing financial problems resulted in the dollar surging to a high of 108.00 yen. While these rumours were denied market players remained unconvinced that all was well in the Japanese banking sector.

Comments by Bank of Japan governor Matsushita that rising interest rates were natural given expectations of Japan's economic recovery, shook the currency market and the dollar fell by almost one yen. Further analysis of these comments however, revealed that the governor was merely commenting on long-term rates rising during a period of expansion and not sanctioning a rise in short-term rates. It appeared that currency traders had over-reacted to these comments and the dollar soon recovered some ground.

In the next week the dollar is likely to trade between 105.0-108.00 yen.

Sterling: The pound remained confined to narrow ranges all week and made modest gain against the dollar and its European counterparts. The political problems of the pound appeared to be improving as the BSE crisis was resolved to some degree and the Conservative party had ironed out their agenda for a referendum on a single currency.

The meeting between Chancellor of the Exchequer Kenneth Clarke and Bank of England governor Eddie George ended without any change in UK monetary policy, some economists however predict that interest rates may be cut by a quarter percent before summer.

Corporate Treasury Services,

BBME, Dubai