Problems in Japan help boost greenback
AFTER tumbling on news that robust US economic growth was accomplished without a corresponding increase in prices, the dollar staged a spectacular rally on Friday. From a four-week low of 1.719 deutschemarks and seven-week low of 108.15 yen, the currency soared to 1.742 deutschemarks and 109.99 yen.
News of a compromise over political reform in Japan and speculation of another discount rate cut provided the fillip against the yen. Against the deutschemark, buyers were simply taking advantage of the dollar's cheap price ahead of Thursday's Bundesbankcouncil meeting.
Opinion is evenly divided on the chances of a rate cut. We expect the Bundesbank to stand firm, however, given that money supply growth is still beyond the bank's target.
US data due for release in the coming week will show a deceleration in economic activity during the month of January. Although employment gains will remain robust, the unemployment rate will shift back upwards which could be slightly negative for the dollar.
Growing conviction that commodity prices have bottomed and upbeat prospects for the Australian economy have boosted sentiment towards the Australian dollar.
In the year to September, the Australian economy expanded by 3.4 per cent and further improvement is expected in the next six months.
The currency is currently trading at 70.87 US cents with a medium term target of 72.50 US cents.
Meanwhile, the Canadian dollar retreated towards the end of the week on thin trade and a lack of fresh buying incentives.
Sterling also drifted lower last week against both the deutschemark and the dollar.
With few releases expected this week, the pound is likely to continue to be affected more by trades in other currencies.
Pauline Gately is head of research at BNP International Financial Services.
However, we would still not rule out a move upwards to 2.62 deutschemarks over the next few weeks.