The dollar clawed back some poise against the European common currency towards the end of the week after posting a string of losses. The greenback?s painful march was hobbled by a gloomy view that the US Federal Reserve (FED) might be putting a halt soon in its tightening campaign. However, Federal Reserve chairman, Ben Bernanke stitched back the dollar somehow by commenting in a speech in New York that short term interest rates might need to go higher than usual if long-dated rates reflected small premiums. He also added that a slowdown in the housing market would be consistent with economic growth and that the large US current account deficit posed a risk but that was not a unique US phenomenon.

Last week, a spat of poor economic indicators and tame inflation figures crushed market confidence and fuelled worries interest rates in the US might be peaking after an almost certain rise to 4.75 percent at the next week policy meeting. The dollar managed to remain mostly within range of the euro despite getting bruised as market talked of the narrowing of the interest rate differentials between the euro and the dollar.

The dollar shed approximately 2 percent of its value against the euro and the driving force of that weakness seemed to be a dramatic shift in the US interest rate expectation, triggered by poor economic data practically at the point where the European Central Bank started its tightening cycle. Suddenly, in the mind of investors, the euro looked more sure-footed than before.

This week the FED Chairman Bernanke will be speaking on the Treasury yield curve and future monetary policy. Actually Ben Bernanke will address, for the first time, an audience other than politicians. Although the market understood that the Fed Chairman would not be rocking the markets wild by making hawkish comments, it nevertheless wondered whether Bernanke would come up with something new.

The yen extended a bounce against the US dollar ever since the Bank of Japan went on a gradualist path of increasing its interest rates from near zero level. In a country plagued by low inflation rates, this process was seen by the market as an attempt to normalize Japan?s monetary policy. In fact, the market talked about an increase in the benchmark overnight rates based upon the belief that the Bank of Japan could envision a scenario whereby upward pressure on interest rates could lead to a hike in the near future. Since the fall of the dollar at 115.50 level, sizeable buying was made causing the greenback to ultimately rebound.

The Sterling had a modest week hovering around 7-month lows against the euro, downcast by prospects of steady UK interest rates or even a cut as compared to the general tightening in monetary policy around the globe. The market brushed off a basket of mixed data on the UK housing market showing that housing prices were rising while underlying mortgage lending growth continued to ease. According to analysts, if house price inflation went up, the Bank of England would be less inclined to cut rates for fear of stroking inflation in the UK property market.

Vassan Caleemootoo Contribution by HSBC