US dollar expected to rebound this week

CURRENCY speculators have achieved their objective of forcing a French franc realignment with the deutschemark. European leaders widened the European Exchange Rate Mechanism (ERM) fluctuation bands to 15 per cent which in effect allows ERM currencies to float freely.

The French franc fell sharply after the announcement but clawed back some of its losses over the week as interest rates cuts, which were expected to have accompanied the ERM restructuring, were not forthcoming. Lower French interest rates are just a matter of time, consequently, the franc will remain soft.

The US dollar lost its ''safe haven'' status as the currency situation in Europe stabilised. This caused the dollar to fall from a year high of above 1.74 marks to close on Friday below 1.70 marks. Some of the dollar's weakness can be attributed to concerns over the US budget deficit reduction package which is being voted on in Congress.

The US unit is expected to bounce back above 1.71 deutsche marks this week due to a technical rebound and as investors reevaluate the non-farm payroll figures which were moderately positive.

The slump in the price of gold undermined support for both the Canadian and Australian dollars. Technical analysis suggests the Canadian dollar is likely to remain weak in the short term.

However, the outlook for the Australian dollar is brighter especially given that the economy expanded by 1.2 per cent in the June quarter, 3.3 per cent on an annual basis, making it the fastest growing economy in the Organisation for Economic Co-operation and Development (OECD). The unit should attempt to breach resistance at 68.8 US cents.

James Mitchell is an economist at BNP International Financial Services (HK) Ltd