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Greenspan sounds cautions against excessive slowdown; euro surges

R. Janakiraman

THE euro continued its bull run this week, rising 2 per cent against the US dollar as concerns of a slowdown in the US economy weighed on the greenback. The Fedreserve Chairman, Mr Alan Greenspan's caution against an excessive slowdown of consumer and bu siness spending in the US, was interpreted by the market as signalling a shift to a neutral stance by the Fedreserve at the next FOMC meeting and possibly a cut in interest rates early next year. The euro benefited from the weak dollar sentiment and rose to a 11-week high of $0.8973 against the dollar and to yen 99.00 against the Japanese currency.

Emerging concerns of a slowdown in the US economy gathered momentum from the data released this week. Leading economic indicators fell 0.2 per cent in October to their lowest levels in a year. Durable goods orders in October, which were earlier reported to be -5.5 per cent, were revised to -5.6 per cent and factory orders during the same month dipped by 3.3 per cent, as against an increase of 1.1 per cent in the previous month. A report in the Wall Street Journal suggesting that the Fedreserve might swi tch to a neutral stance in its December 19 meeting added to the pressure on the dollar. Riding this wave, the euro, which started the week at $0.8753 level rose on Monday to a high of $0.8933.

The euro retreated from the previous day's highs on Tuesday as soft Eurozone economic data prompted dealers to take profits on the euro. The E-11 services sector activity index fell to 58.4 in November; the Zone's Purchasing Managers' Index fell to 54.6, its lowest level since mid-1999.

The Chairman of the Fedreserve, Mr Alan Greenspan, in his address to a bankers' conference in New York on Tuesday confirmed that the US economy had slowed down appreciably and excessive caution in lending and weakening asset values in financial markets c ould precipitate pullbacks in household and business spending. The market operators contrasted this with his ``irrational exuberance'' speech five years ago and saw this as an indication that the next FOMC meet would adopt a neutral stance and the Fed wo uld probably reduce interest rates early next year. This triggered an unprecedented rally of 10.5 per cent in the Nasdaq and a 3 per cent gain in the Dow Jones Industrial average. The euro had to retreat to $0.8788 on Tuesday.

The euro resumed its rally on Wednesday when US productivity in the third quarter was revised down to 3.3 per cent from 3.8 per cent announced earlier. The Fedreserve's Beige Book review also showed that the economy was showing signs of cooling. The euro rose to $0.8922 and further to $0.8973 (a 11-week high) on Thursday as concerns about the US economic slowdown continued to pressure the dollar. The euro also drew support from the comments of Mr Horst Siebert, senior economic advisor to the German gove rnment, that converging growth trends between the Eurozone and the US would go to boost the euro.

Ahead of the release of US non farm payroles data on Friday, cautious trading restrained the euro, which was ruling around $0.8885.

Against the Japanese currency, the dollar moved within a narrow range of 1-1/4 yen this week. The market showed little reaction to news on Monday that the Japanese economy grew by just 0.2 per cent in the July-September quarter and by 1.0 per cent over t he year.

The Japanese cabinet submitted its resignation en masse on Tuesday to enable the Prime Minister, Mr Yoshiro Mori, to have a new line-up. But, dealers, unimpressed by the reshuffle, were sceptical of the chances for any drastic economic reforms as long as Mr Mori continued in power. There was no impact on the exchange rate.

With the euro strengthening on Wednesday and Thursday, yen selling against euro emerged. Household spending, which accounts for roughly 60 per cent of Japanese GDP, fell by 0.2 per cent on the year in October. The yen was also weighed down by a fall in J apanese long-term interest rates from 1.625 per cent to 1.560 per cent, the lowest in 18 months. The dollar remained in the range of yen 110.16-110.90 for the rest of the week.

The British pound, gaining on the general weakness of the dollar vis-a-vis the euro, rose to a 5-week high of $1.4555 on Monday. It fell the next day to $1.4312 in line with the euro.

Weak UK October manufacturing and industrial production numbers acted as a drag on the pound, which touched the week's low of $1.4311 on Wednesday. However, the Confederation of British Industry's November survey showed a net +13 of UK retailers enjoying higher sales (compared to a net zero in October), which took the pound higher to $1.4498 on Thursday. The Monetary Policy Committee of the Bank of England left interest rates in the UK unchanged for the 10th month in a row. This was the longest stretch of unchanged interest rates in the past 11 years and the market expects that when the US cuts rates early next year, the UK will follow suit. The BoE's announcement was in line with market expectations and did not impact the exchange rate. On Friday, the pound continued to trade at the $1.4470 level.

The exchange rates ruling in Europe in the forenoon on Friday were: $0.8880 against the euro and $1.4470 against the pound; and DM 2.2020, yen 110.80 and SF 1.7020 against the dollar.

Re firms up on improved sentiment: The rupee had a quiet week. An increase in the forex reserves consequent on IMD inflows, a fall in oil prices and the US dollar's weakness against the euro all contributed to improved sentiment for the rupee.

After opening the week at Rs 46.8400/8550 to the US dollar, the rupee improved on accumulated dollar supplies over the week-end. Saudi Arabia's assurance to offset any shortage of oil supplies arising out of Iraq's reported move to cut oil exports helped calm fears of further rises in oil prices and their effect on the country's already bloated oil import bill.

Good dollar supplies in the market and waning buying interest due to the holiday season with operators unwinding their dollar positions, took the rupee to the week's highest level of Rs 46.71/72 on Wednesday. The rupee closed at Rs 46.75/76 on that day.

The market was quiet thereafter and the rupee closed at the same level of Rs 46.75/76 on Thursday and Friday.

The forward dollar premia maintained a soft tone throughout the week. Much of the SBI's IMD scheme collections seems to have flowed in and the counterpart rupee funds are keeping the call money market liquid. Consequently, the forward rates have remained soft. The premium on 6-months' forward dollars started the week at 4.10 per cent per annum and dropped to 3.7 per cent p.a. on Friday (87 paise per dollar).

Call money rates hovered around the RBI's repo rate of 8 per cent throughout the week. SBI has offered rupee funds to the banks which collected IMDs at 10 per cent as per its commitment but with the call market remaining at 8 per cent, the banks were not so keen to receive the funds at this stage. On Friday, call money was quoted at 7.95-8.05 per cent p.a. at the close of business.

With the inflow of IMD funds, the Reserve Bank's foreign currency assets have surged by $1.214 billion and stood at a record high of $35.489 billion on November 24. The previous record was $35.359 billion on April 14.

The total reserves have also increased to $38.291 billion on November 24 but they are just below the record high of $38.341 billion on April 14 mainly because holdings of gold, though unchanged in weight, have come down in value terms by $174 million bet ween the two dates.