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Dollar’s edge gone with the wind
Nervousness gained traders when the US dollar dilemma continued despite the Federal Reserve raised rates by 25 basis points to 5.0 percent. In fact, traders became jittery when the FTSE100 nose-dived by 150 points on Friday, its worst day in three years. On Wall Street, the Dow Jones industrial average fell by more than 1 per cent as investors expressed concerns about rising inflation and interest rates.
At the heart of market fears, an ominous slide in the greenback lurked around. The US currency softened on Tuesday hurt by market speculations that the Federal Reserve would be ending its tightening campaign at wednesday’s Monetary policy. Consequently, traders recoiled from risky positions and went short on the dollar. After lifting interest rates by another quarter basis points to 5.0 percent, the FED in its accompanying statement stated that further rate hikes were in store but would be positively correlated to the economic outlook. In a knee jerk reaction, the dollar gained against most major currencies but the upward swing never gained momentum as bearish dollar sentiments lingered around. The euro wiped out its losses and progressed to $1.2945 up from $ 1.2751.
Pressures continued to pour onto the greenback as retail sales came out dovish. On the other hand, a big rally in the metal markets seemed to hit the dollar full blast, eroding the yield advantage of dollar-denominated assets. Both gold and silver bubbled to a quarter century high, while copper and platinum set record highs.
The greenback took a breather towards the end of the week, as the US Treasury report did not call China a currency manipulator. This improved market sentiment vis-à-vis the dollar, calmed market fears of disruptions to global trade and foreign exchange flows. In addition, China responded positively by stating that it would reform its foreign exchange system; hence increasing flexibility of the yuan currency. Furthermore, US trade data for March came out better than expected helping some traders to shrug off nagging feeling about the US economic outlook.
■ The US dollar traded at MUR 30.989 yesterday same as last week.</B>
The Sterling benefited from a string of upbeat economic data and widespread reservations against the greenback. British retail sales, according to the British Retail Consortium, accelerated to their quickest pace in four years in April. Residential house prices in both England and Wales surged in the first quarter. These data helped quashed expectation of UK’s rate cut and prompted speculation that the next move might be a hike. The Sterling hit a one year peak against the dollar when, David Walton, from the Bank of England Monetary policy committee, stated that policy makers believed strongly that the UK’s economy emerged from a soft patch. Economic think tank NIESR also brushed a pretty picture of the UK’s economy by stating that Britain’s economy grew by 0.6 percent in the last three months and warranting an imminent hike in interest rates from the current 4.5 percent.
■ The Sterling was traded at MUR 58.87 as against MUR 57.96 last week.</B>
Extreme volatility in the currency market sent tremors to Tokyo currency traders. Many strongly believed that the Japanese Finance Ministry would go beyond “verbal intervention”, which uses key phrases to rein in the market, and to intervene by physically selling the yen and buying dollars. Other traders braced for the impact of the US currency shedding two yen in the course of last week ; hence, calling for an inevitable intervention by the Finance Ministry. However, the Finance Ministry had only voiced the “undesirability” of the dollar’s sharp slide against the yen, but according to analysts, that stance was similar to that which preceded the 2003-04 currency intervention in which Japan bought $ 200 billion.
The yen was sold at MUR 28.43 as compared to MUR 28.00 last week.
<B>Vassan CALEEMOOTOO
HSBC Mauritius Treasury and Capital Markets</B>
<B>Major data/events this week</B>
Wednesday 17 May: US Mortgage index and US CPI.
Thursday 18 May: US Jobless claims, JP BoJ meeting, GDP Deflator.
Friday 19 May: BoJ report
Tuesday 23 May: US Redbook
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