Yen gains strength as big meeting draws near
TRADING volumes on the world's foreign exchange markets tailed off last week as the holiday mood set in at financial markets.
The US dollar staged a recovery against the deutschemark on Tuesday when sentiment was dented by disastrous economic releases showing West German unemployment at eight per cent and plummeting industrial orders.
Statements by the German economics minister Mr Guenter Rexrodt that the country's economy could contract by more than the government's official forecast added to the gloom.
The US dollar was not the only currency to benefit. Sterling rallied to 2.45 deutschemarks on Thursday. Meanwhile, the yen tested resistance at 70 yen to the deutschemark. The yen is fast approaching its record high of 68 yen against the German currency and is expected to maintain its recent strength ahead of the G7 foreign and finance ministers' meeting scheduled for this week.
European monetary union received a shot in the arm on Thursday following new French prime minister Mr Edouard Balladur's affirmation of the franc fort in his first policy statement to the National Assembly. Mr Balladur's economic blueprint maintains a strong and stable currency as the first condition for restoring economic growth.
Holland and Belgium both shaved key interest rates by 10 basis points before Mr Balladur's speech encouraging speculation that France and Germany might follow suit. Market watchers were disappointed, however. The next Bundesbank council meeting is scheduled to take place on April 15. Consequently, rate cut speculation is likely to dominate the market when trade resumes after the Easter break.
Interestingly, one drag on the US dollar may soon disappear. Since the beginning of the year, the Bundesbank has been selling dollars as part of its effort to reduce foreign currency balances accumulated during the ERM crisis last year. Bundesbank reserve management has, therefore, been supporting the German currency - not only against the US dollar, but also its ERM counterparts in the last few months. Reports suggest that this is near completion.
Pauline Gately is head of research at BNP International Financial Services While this should be positive for the dollar versus the deutschemark, the market appears to have become frustrated with the pace of interest rate relaxation in Germany. Recent news of moderate gains in the US economy and subdued inflation are likely to cap the greenback in the short term.
The Australian and Canadian dollar surrogates could provide some interesting trading opportunities this week. An unexpected drop in Australia's jobless rate below 11 per cent and technical trading should support the Australian and Aussie units.