Dollar falls against mark, yen
THE dollar came under vicious attack towards the end of the week as concern over Mexican political developments and President Clinton's role in the Whitewater affair, sent US financial markets into a tailspin.
Lofty German money supply growth aggravated negative sentiment, sparking a dollar liquidation which sent the currency tumbling against both the deutschmark and the yen. At the end of New York trade on Friday, the currency traded at 1.6645 deutschmarks and 104.80 yen.
The short term outlook is not encouraging with the market remaining anxious. It follows noises from the Bundesbank that inflation is still too high, extinguishing hopes of a German rate cut, and comments from economists that a range of 90 to 100 yen per dollar is required to reduce Japan's bilateral trade surplus.
Only aggressive interest rate action, which is clearly not on the cards after Tuesday's 25 base point inter-bank interest raise, or an escalation of tension between North and South Korea would help the US currency right now.
The Whitewater affair will eventually fade, but in the meantime will act as a drag on the US currency.
Elsewhere, the Canadian dollar continued to drift lower despite a prime rate increase at Canada's principal banks.
The base lending rate at five of the country's major institutions jumped from 5.50 per cent to 6.25 per cent but provided little support for the Canadian dollar which looks destined to slide further over the coming week. A test on 1.38 Canadian dollars to the US dollar could transpire.
Sterling is beginning to look interesting again now that it has slipped below 2.50 deutschmarks.
The currency bounced off a four-month low below 2.49 deutschmarks on Friday.
Sentiment has been hit by lingering speculation of another interest rate reduction in the UK and dollar weakness against the German currency, but on a three month view, this could represent a buying opportunity.
Pauline Gately is head of research at BNP International financial Services Ltd