TRADING activity last week was largely driven by rumours of interest rate cuts in Europe and economic data release.
A marginal 0.2 per cent rise in November producer prices and a 0.1 per cent rise in December consumer prices signals a mild inflationary trend in the American economy.
This, along with a 1.4 per cent decline in the Michigan Confidence Index, more or less quashed any expectations that the Federal Reserve might raise interest rates during the next three months.
Further dollar gains will, therefore, be underwritten by non-US factors.
Consequently, the greenback should consolidate in a trading range of 1.62-1.64, biding its time until European and Japanese interest rates are lowered.
The deutschemark gained ground mid-week, rising to 1.61 deutschemarks to the US dollar, but slipped back to 1.63 on rumours that the Bundesbank would lower interest rates over the weekend.
Speculation has been fuelled by reports that the German government has negotiated a ''solidarity'' pact with trade unions to hold down the level of wage increases this year. Short term money market rates are likely to be the target for any reduction rather than the official discount or Lombard rates. Until interest rate speculation recedes, the deutschemark is expected to move sideways.
