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All eyes on crucial BoJ meeting

R. Janakiraman

THE dominant theme in the forex markets this week was the chances of a rate hike in Japan. With the Bank of Japan (BoJ) Governor, Mr. Masaru Hayami, seemingly keen on a rate hike, the yen strengthened to the week's high of 106.54 to the US dollar on Mond ay. Later, when news of the bankruptcy of the Japanese retail giant, Sogo Co., came in, doubts surfaced about the BoJ tightening credit at this juncture and the yen gave back its gains and eased to 108.47 on Wednesday.

After strengthening to $0.9566 on Tuesday, the euro was pressured by M&A news involving dollar outlay by European companies and slipped to $0.9320 on Thursday. The British pound also dipped to $1.4978.

After the weekend G-7 Finance Ministers' meeting in Fukuoka, Japan, the market saw increasing chances of a rate hike by the BoJ after the meeting of its Policy Board on July 17. There was no vocal opposition at the G-7 meet to an end for Japan's zero int erest rate policy. The US Treasury Secretary, Mr. Lawrence Summers, confined himself to his oft-repeated line that Japan should focus on sustainable domestic demand-led growth. At the G-10 meeting in Switzerland, Mr. Hayami mentioned that conditions are right for Japan to end its super-easy credit policy.

Japanese machinery orders recorded a healthy rise of 4.5 per cent in May, breaking a 4-month stretch of falls and taking the year-on-year growth to a lofty 17.7 per cent.

The yen, riding on the wave of rate hike hopes, rose to the week's high of 106.54 on Monday. The market was led by Japanese officials apparently preparing the way for a hike. The EPA Minister, Mr. Taichi Sakaiya, who had been opposing a hike, surprised t he markets when he said on Tuesday that ending the zero rate policy would not have a significant macro-economic effect. The BoJ Policy Board members, Mr. Susumi Taketomi and Mr. Toshio Miki, joined in the chorus saying that monetary conditions would rema in very loose even after the end of the zero-interest rate regime. The market has thus priced in a rate hike of 25 basis points on Monday.

Bad news for the yen came on Wednesday. Japan's retail giant, Sogo Co., groaning under a huge debt burden amounting to 1.87 trillion yen, filed for bankruptcy. Its collapse would be the second largest bankruptcy ever in Japan. This casts doubts on the na tion's economic recovery as its ripple-effect could affect other organisations. At this juncture, will the BoJ find it appropriate to hike interest rates? Many operators considered it doubtful and the yen was pushed down to the week's low of 108.47 on We dnesday.

The dollar also drew support from the Fed Reserve Chairman, Mr. Alan Greenspan's statement that he saw no signs of a slowdown in US productivity growth. This buoyed US equities and the technology-laden Nasdaq composite rose to a new 3-month high of Thurs day.

The Japanese Government decided not to step in and rescue Sogo in spite of it being a large employer. The news led the market to believe that this decision augured well for continuing the economic restructuring in Japan. The yen retraced some of its fall and was ruling around 108.00 levels on Friday.

The euro's outlook was bullish at the beginning of the week. The German Finance Minister, Mr. Hans Eichel, went so far as to suggest that the euro zone could, by the end of the year, take over from the US as the locomotive for world growth. Euro's upside , however, was checked by a statement from the French Finance Minister, Mr. Laurent Fabius, that any further interest rate hike by the European Central Bank (ECB) might damage the zone's growth.

The Financial Times reported on Tuesday that Germany's Deutsche Telekom has offered $30 billions to acquire the US mobile phone company, Voicestream Wireless Corp. As this would lead to the purchase of US dollars against the euro, the European currency f ell to $0.9472, the dollar also deriving support from the uptrend in the US stock market.

On Wednesday, the dollar gained sharply against the Swiss franc as UBS AG announced that it would pay half of its $10.8-billion price for the US securities firm, PaineWebber, in cash. The dollar thus shot up from SFr 1.6274 to SFr 1.6546 and further to t he week's high of SFr 1.6637 on Thursday.

The weakness of the Swiss franc was reflected in the euro. Further, weaker than expected German trade and current account data for May also pulled down the euro which sank to the week's low of $0.9320 on Thursday. This was despite an upward revision to t he euro zone GDP for the first quarter to 0.9 per cent from 0.7 per cent over the previous quarter. The euro continued to remain around that level on Friday.

The pound sterling rallied to $1.5192, the highest level of the week, on Monday, but could not breach the $1.52 barrier. The UK June output prices came stronger than expected with the core figure rising at an annual 1.1 per cent, the fastest rate since A ugust 1996.

The latest survey of the financial sector in the UK by the CBI, however, showed optimism at its lowest level in 18 months in the second quarter. On Tuesday, the retail price index for June came slightly stronger at 2.2 per cent (year on year). The pound traded in a range above $1.5120.

With the average earnings for May coming in softer at 4.6 per cent on the year, the pound weakened to $1.4978 on Thursday, also reflecting the dollar's strength against the European currency and the Swiss franc. On Friday, the pound was moving around $1. 50 levels.

The exchange rates ruling in Europe on Friday forenoon were: $0.9335 per euro and $1.4985 per pound and DM 2.0945, 107.90 yen and SFr 1.6550 to the dollar.

Rupee in narrow range

The rupee opened the week at 44.7050/7200 to the US dollar, the same level it closed last week. The sentiment for the rupee improved on Monday on account of the reported rise in the Reserve Bank's foreign currency assets at end-June, after 10 consecutive weeks of decline. Monday is typically a `supply day' with dollar inflows accumulated over the week end coming to the market. There was a supply of nearly $100 millions from foreign banks and FII custodians. The rupee strengthened on the day to 44.6550/6 650.

On Tuesday, dollar demand from FIIs saw the rupee weaken slightly to 44.6850 but it improved a bit towards the close.

The markets remained thin on Wednesday as heavy rain disrupted traffic in Mumbai and banks reported thin attendance. There was good corporate demand for dollars from outstation centres which was taken care of by FII inflows and interbank dollar sale.

The rupee weakened slightly on Thursday initially on a shift in the spot delivery date to Monday but the thin market conditions later steadied the rupee. On Friday, the rupee opened at 44.70 to the dollar. With emerging dollar demand met by interbank sal es, the rupee closed the week at 44.6950/7050.

The forward dollar premia opened lower on Monday in line with the rise in the spot rupee. Weak demand for forward cover saw the premia edging up to 3.4-3.5 per cent level. For the rest of the week, premia remained steady. On Friday, the premium on 6-mont hs' forward dollar was quoted at 79 paise, or 3.5 per cent annualised.

Call money rates ruled just above the 7 per cent-mark and briefly went up to 7.60 per cent in a thin market on Wednesday. On Thursday, the call money market saw little activity as the clearings remained suspended on account of heavy rains in Mumbai. The RBI allowed Wednesday's deals to be rolled over to Friday for settlement. On Friday -- which is a reporting day -- the call money rate closed at 6.75-7.00 per cent p.a.

The Reserve Bank's foreign currency assets have, after moving down continuously for 10 weeks, registered a small rise. The reserves stood at $33.774 billions on June 30.