May 12, 2003	Monday	Rabi-ul-Awwal 9, 1424

THE currency market showed a stable trend this week. The rupee managed to hold its weekend levels versus the dollar in the inter-bank market and traded on May 5, at Rs57.79 and Rs57.81, reflecting a single paisa gain against the previous weekend close of Rs57.80 and Rs57.82.

Some business activities were seen in the market as corporate sector opted for dollar buying for its immediate needs, but steady inflows helped the rupee to keep its prevailing level versus the dollar. On May 6, the rupee maintained its firmness and remained unchanged for buying at Rs57.79 and showed only one paisa gain for selling at and Rs57.80. Money market was tight amid thin activity. Balanced demand and supply position helped the rupee-dollar parity to hold the present levels.

A stable demand and supply position in the inter-market did not affect the rupee-dollar parity on May 7. The rupee remained at Rs57.78 and Rs57.80 in the absence of major bank demand. Tight money supply position and less demand for dollar on May 8 encouraged the rupee to recover two paisa versus the greenback for buying and selling at Rs57.85 and Rs57.67, respectively. Major banks were on the sidelines in the absence of urgent needs. The week finally closed at Rs57.76 and Rs57.77, down one paisa for buying. The rupee, however, showed 3 paisa gain over the dollar in the week.

In the kerb the rupee remained unchanged versus the dollar for buying and selling at Rs57.85 and Rs57.90 on the opening day of the week on May 5. It maintained this level in the first five days of the week amid sluggish trading, closing the week at Rs57.82 and Rs57.85 on May 9. The rupee, however, recovered 10 paisa in relation to the euro for buying and selling to trade at Rs64.70 and Rs64.90 on May 5. It gave up its overnight firmness versus the euro on May 6, losing 70 paisa for buying and selling at Rs65.60 and Rs65.90. On May 9, the rupee further shed 85 paisa against the euro. It traded at Rs66.20 and Rs66.50, after crossing the Rs66 barrier in the early session. During the week, the rupee shed 150 paisa versus the euro but gained 5 paisa against the dollar.

Against other major currencies at the inter-bank counter, the rupee did not show any change versus British pound. However, it extended further losses against Canadian, Australian, New Zealand and Singapore dollars, Swiss franc, Swedish krona, Danish and Norwegian krones and Japanese yen. The rupee reflected gains over Saudi and Qatari riyals, Kuwaiti dinar, UAE dirham, Malaysian ringgit and Hong Kong dollar. It also remained stable against the Chinese yuan.

On international front, the euro rose to its highest level in four years against the dollar, yen and sterling on May 5 after an improvement in the US service sector failed to dispel broader concerns about the economy. The single currency reached its highest level since late February 1999 versus the dollar at $1.1302 but eased off those peaks to finish the US session at $1.1285. Some analysts expect the euro to reach $1.20 by year’s end. It bought 133.85 yen, its highest since March 1999 and up 0.25 per cent on the day. It also rose to its highest since January 1999 against sterling closing the day at 70.25 pence. The dollar traded in a narrow range against the yen, ending US trading 0.37 per cent lower on the day at 118.58 yen.

On May 6, the euro surged to its highest level since January 1999 against the dollar after the US Federal Reserve left interest rates unchanged while warning the economy remains at risk for further weakness. In its decision to leave US benchmark interest rates at their lowest in more than 40 years, the Fed said the easing of global tensions associated with the war in Iraq had abated, thus lifting the primary impediment to an economic rebound. The euro’s 7.3 per cent surge in the last month against the dollar reflects investor concerns that the US economy, the driver of the global economy, is sputtering. The widening US current account deficit, which is at a record above $500 billion, only increases the downward bias for the greenback.

Europe’s common currency rose as high as $1.1453 against the dollar, setting a new 4-year high for the second consecutive session. In late US trading, it pared those gains some to stand at $1.1425, up 1.20 per cent from its previous US close. Helped by the single currency’s gains against the beleaguered dollar, the euro also reached its highest since late February 1999 against the yen. It traded near 134.25 yen, and soared to new 4-year highs against sterling at 70.90 pence. The dollar bought 117.51 yen, down 0.88 percent from its prior US close and its weakest since April. The US currency also sank to its lowest level in nearly 2 months against the Swiss franc, trading near 1.3243 francs.

Sterling had a volatile session falling to a four-year low against a rampaging euro before recouping lost ground and rising to its highest against the dollar in almost two months. Sterling clawed back to stand little changed against the euro in late London trade and pushed to $1.6140, its highest since March 12. The pound slid to 70.56 pence per euro in the European mid-session, its lowest since January 1999, as the single currency stormed to new four-year highs against the dollar and the yen. Sterling has had a volatile day, falling below 70.40, its old ERM floor of 2.78 marks, to 70.56 before the offers starting coming in.

On May 7, the euro fell against the dollar and hurt by speculation that the European Central Bank may reduce interest rates and erode the yield advantage enjoyed by the single currency. In a whipsaw session that saw the European currency shed more than a cent from previous day’s 4-year low as traders booked profits, markets began to look ahead to the ECB’s interest rate policy meeting. The euro fell as far as $1.1331 against the dollar recovering slightly to trade near $1.1370 in late US dealings. It was off by more than 0.60 per cent on the day. It previous day’s four-year low against the yen, falling 1.70 per cent from its prior US close to stand near 132.23 yen. Broad dollar weakness converged with heavy euro/yen liquidation, traders said, dragging the dollar to its lowest in 10 months against the Japanese currency. In late US trading, the dollar bought 116.30 yen off more than 1 per cent on the day.

The yen’s sharp rise against most major units heightened the risk that Japan could sell its currency in order to weaken it. However, the euro’s nearly 8 per cent surge against the dollar in the last month is raising concerns it has moved too far too fast. Several German manufacturers have complained that the strength of the currency has hurt their competitiveness in global markets. The British pound slid to a six-year low on a trade-weighted basis as concern the Bank of England would cut interest rates this week sent it crashing through key chart levels. In a volatile session, the pound fell to 97.40 on its trade-weighted index, a level last touched in early 1997 and its sharpest one-day slide in over a year. Sterling has been struggling ever since the February rate cut. It fell as low as 71.41 pence per euro in European afternoon trade - its lowest since January 1999 and within half a penny of record lows hit shortly after the euro’s launch. The British currency has now fallen almost 10 percent against the euro since the start of the year. It tumbled more than one percent against the dollar to lows of $1.5905, down almost tow cents from three-month highs scaled on May 6.

On May 8, the euro surged to a four-year high against the dollar as the European Central Bank’s decision to keep interest rates unchanged kept intact the yield advantage of euro zone assets. The ECB kept benchmark rates steady at 2.50 per cent.