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Dubai: Last week foreign exchange markets were very volatile, large financial institutions continued to post billion-dollar writedowns and markets feared that the credit market turmoil would spill into the European financial sector.
Fed chairman Bernanke has said that the US economy may fall into a recession in the first half of 2008, cooling hopes that the credit crisis was over.
This week markets will look towards the Bank of England and the European Central Bank's interest rate decisions.
Euro
The greenback edged up against a basket of currencies at the start of last week but was under pressure against the euro as investors awaited signals on the health of the US economy.
The greenback was down more than eight per cent on the quarter versus the euro, its worst performance in three years. Data released from the euro zone revealed inflation jumped to new highs in March, effectively ruling out any near term European Central Bank interest rate cuts.
Euro zone CPI accelerated to 3.5 per cent year-on-year in March from 3.3 per cent in February, the fastest pace in almost 16 years, boosted by higher energy and food prices.
Economic sentiment in the euro zone fell 99.6 from 100.2, the lowest reading since November 2005, signalling a slowdown in the first half of the year.
However, there was soon a reversal in the euro's fortune, with the currency depreciating by more than one per cent against its US counterpart after the combined news that UBS wrote down $19 billion in US real estate and related assets and that Deutsche Bank also expects to write down $4 billion in the first quarter.
The news fuelled worries that the credit market turmoil will spill into the European financial sector. Euro was also dragged down by disappointing German retail sales data and a move by Spain's central bank to slash its growth forecast.
This trend continued with the dollar gaining ground against the euro after the release of a better than expected report on US manufacturing activity for March, and to purchasing from hedge funds and investors at the start of a new quarter.
The dollar depreciated against a basket of currencies after US corporations cut 80,000 jobs in March, marking a third consecutive month of job losses. The unemployment rate rose to 5.1 per cent, the worst since September 2005.
The March payrolls number does not include the latest jump in jobless claims, which have hit recessionary levels.
Range for previous week: $1.5509-$1.5895 (Dh5.6980- Dh5.8398).
Range for this week: $1.5580-$1.5880 (Dh5.7241- Dh5.8343).
Yen
In addition to the dollar positive news out at the beginning of the week, namely good corporate results from the banking sector in the US, profit-taking on commodities such as gold and oil - which generally have an inverse relationship to the greenback, and the prospects of a lower interest rate cut of 25 basis points as opposed to 50 points by the Fed at the end of this month, the dollar also benefited from the beginning of a new financial year in Japan where investors generally sell the low interest yielding yen to invest in higher yielding currencies abroad.
The yen was also under pressure from weaker than expected Japanese industrial output data for February, which did little to dispel market views that the Bank of Japan may be forced to trim interest rates.
The yen continued to be under pressure after the Tankan quarterly corporate survey revealed that Japanese business sentiment worsened more that expected in the past three months. However, the yen ended the week on a stronger note against the dollar after the release of disappointing US data.
Range this previous week: 98.80 yen- 102.95 yen (Dh0.035687-Dh0.037186).
Range for this week: 99.50 yen-103.00 yen (Dh0.035669- Dh0.036924).
Sterling
Sterling fell to record lows against the euro at the start of the week after data revealed British house prices fell for the sixth straight month in March. Further disappointing data came in the form of UK services PMI index, which had a reading of 52.1.
However, soon the pound ticked up versus the euro and dollar, bolstered by an increase in risk appetite, but analysts said the long-term outlook for the British economy and its currency remained relatively glum.
Risk appetite improved broadly on speculation that the worst of the credit crisis may have passed after the latest batch of bank writedowns. This was positive for the pound, which has been hard hit by trouble in the financial sector in recent months .
Range for previous week: $1.9727-$2.0048 (Dh7.2477- Dh7.3656).
Range for this week: $1.9770-$2.0100 (Dh7.2635- Dh7.3847).
- HSBC Global Markets Middle East
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