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IFO survey strong but euro surrenders gains

R. Janakiraman

THE week saw the major currencies break out of the ranges set in the previous weeks. The movements were sharp in almost all the major currencies, although there was very little significant economic data released during the week. Market expectations of a strong IFO business survey index in West Germany pushed the euro to the week's high of $ 0.9694. The euro could not sustain that level and after the release of the index for May and after the ECB left interest rates on hold, the euro experienced a setbac k to the $ 0.9354-level on Thursday. The Japanese yen continued to threaten to strengthen, sending jitters to the Japanese officials even as they gear up to face the general elections this Sunday.

When the week opened, the dominant feeling in the market was that while the US economy was slowing down, the eurozone was strengthening and Japan was also witnessing a recovery. There were rumours on Monday that the West German IFO business survey index for May to be announced on Tuesday would be very strong. The share offering by Deutsche Telekom A.G. and hopes of business restructuring spurred by news that the Dresdner Bank and Commerz Bank were looking for a link-up, all contributed to a demand for t he euro, pushing it to the week's high of $ 0.9694 on Monday.

The IFO index for May did come in stronger at 102.1 against April's 101.2 but the rumour machine had kindled even higher expectations around 102.7. After the release, the enthusiasm for the euro ebbed and the euro, failing to sustain its recent gain, sof tened to $ 0.9529 on Tuesday. Another contributory factor for the euro's weakening was the ECB left interest rates on hold after the board meeting on Wednesday. Not that the market was expecting a hike but the statement made by the President of ECB, Mr. Wim Duisenberg, that the recent 50 basis point hike would be the last in the series acted as a damper. The euro slid down to $ 0.9428 against the dollar and to yen 99.50. Continuing the same trend, the euro dipped to the week's lows of $ 0.9345 against t he dollar and 97.50 against the yen on Thursday.

The Japanese yen was buoyed against the dollar and euro as the focus shifted to the prospects of Japan's economic recovery and an end to the BoJ's near-zero interest rate policy. The Economic Planning Agency (EPA)'s monthly report was due on Tuesday. The statement by a normally dovish Deputy Governor of BoJ, Mr. Yutaka Yamaguchi, on Monday that the end of the 16-month long zero rate policy was near, boosted the yen to yen 105.60 from the earlier level of yen 106.51 to the dollar.

With the elections due over the week-end, Japanese officials continued to talk up the economy which gave rise to rumours that the EPA monthly report would be very positive. This further drove the yen up to 105.20 level on Tuesday. Though the EPA report c ontained nothing surprising, the trend was set for the market to expect a possible rate hike after the elections, possibly in July itself.

The market has become obsessed with the yen 105.00 level as a potential trigger for BoJ intervention, since the Finance Minister, Mr. Kiichi Miyazawa, mentioned it in a press conference a few weeks ago. So, on Thursday, the markets threw the gauntlet at BoJ, pushing the dollar below the crucial level of yen 105.00 to the week's low of yen 104.11. Mr. Kuroda and Mr. Usui, Vice-Finance Ministers, were out with comments reiterating the official line that the yen's level did not reflect economic fundamental s and that BoJ was prepared to act if necessary. On Friday, the same level continued with no sign of BoJ intervention. There is a feeling in the market that BoJ is perhaps laying a trap for speculators and that once the elections are over, the bank would intervene heavily to bring the dollar up to the yen 105 level.

The pound sterling traded within a very tight range on Monday and tracked the euro/dollar rate. After a dull trading session on Tuesday morning, the pound moved down to $ 1.5045 which is a five-day low. Later on, however, it bounced back to the week's hi gh of $ 1.5203 amid talk of a giant buy order for sterling, related to M&A activity; there was a rumour that the UK software maker, EIDOS may be taken over by some French firms.

The interest rate differential between the US and the UK continues to haunt the pound and it came under pressure on Wednesday to hit a 19-day low of $ 1.4937. There was little impact of the minutes of the Bank of England's Monetary Policy Committee meeti ng for June which showed a third of the members wanted an immediate 25 basis point hike in interest rates to pre-empt inflationary risks of the weakening pound. Eventually, no change in the rates was made by the committee and the market found reason to b elieve that the UK rates have peaked, after the committee indicated a weakening in demand, retail sales and earnings. After moving up briefly to $1.5157 on Thursday, the pound slipped to $ 1.5022 level on Friday on account of profit-taking.

The Swiss franc riding on the back of the 50 basis point interest rate hike last week rose on Monday to the week's high of SF 1.6101 to the dollar. A correction to this sudden spurt followed and when the euro dipped in the latter part of the week, the fr anc also weakened to SF 1.6578 on Friday, the level ruling a fortnight ago.

The exchange rates quoted in Europe on Friday morning were: $ 0.9376 to the euro and $ 1.5022 to the pound and DM 2.0853, yen 104.26 and SF 1.6516 to the dollar.

Rupee looks up

As compared to the last week, this was a quiet week for the rupee. It opened on Monday at Rs. 44.7000/7200 to the dollar and appreciated on account of good inflows from FIIs and moderate dollar demand. The rupee closed at Rs. 44.65/66 after briefly hitti ng the week's low of Rs. 44.70/72 on that day.

For the next two days, the rupee moved in a narrow range with moderate two-way flows reported in the market.

On Thursday, after opening at Rs. 44.6525/6675, the rupee softened a bit to Rs. 44.6950 due to good corporate demand for dollars and after SBI came in to buy the greenback. The banks also went long on dollars on reports that a State-run gas firm was look ing to buy dollars. Eventually, this demand did not materialise and there was a rush to unload dollars. The rupee closed firmer at Rs. 44.6550/6650. On Friday, the rupee faced some corporate dollar demand and it ended the week at Rs. 44.6825/6900.

Forward dollar premia opened the week around 3.4 per cent (for 6 months). The RBI tightened the short-term money market by fixing a cut-off rates of 13.50 per cent on Monday and 14 per cent on Tuesday for its one-day repo auctions. This drove the call mo ney rates to the week's high of 18 per cent at which level it was unviable for banks to go long on dollars. Later in the week, the call rates steadied around 11-13.5 per cent and the premium on 6-month dollars closed the week at 73 paise, or 3.3 per cent annualised. Call money also closed on Friday at 12.5 per cent - 13.5 per cent p.a.

The foreign currency assets of the Reserve Bank have slightly moved down for the 8th consecutive week. They stood at $ 34.002 billions on June 9.