March 27, 2006	Monday	Safar 26, 1427

FIRMNESS prevailed in currency market on the opening day of the week, as rupee managed to resist sharp decline versus the dollar and the euro. In inter-bank market, the rupee opened on a negative note, falling slightly on low dollar demand. It shed two paisa for buying and one paisa for selling to trade at Rs60.19 and Rs60.20 on March 20. Last week, the rupee had closed at 60.17 and 60.19

The rupee managed to recover two paisa more on March 21, amid smooth dollar supply, changing hands at Rs60.15 and Rs60.17 versus the dollar. It continued an upward trend on the third day of the week, gaining another five paisa and traded versus the dollar at Rs60.10 and Rs60.12 on March 22. The market was closed on March 23, being the Pakistan Day holiday.

Dollars’ selling by the exporters and significant improvement in remittances boosted the rupee to regain its strength versus the greenback. The parity extended overnight gains recovering eight paisa more to trade at Rs60.02 and Rs60.04. During the week, the rupee in inter-bank market gained 15 paisa against the dollar, amid fluctuations.

In the open market, the rupee showed strength over dollar on March 20, posting a fresh gain of five paisa for buying, while holding its weekend level for selling unchanged. The dollar traded at Rs60.30 and Rs60.40 against the previous week close of Rs60.35 and Rs60.40. On March 21, the rupee extended its overnight firmness further gaining four paisa for buying and 10 paisa for selling to trade Rs60.26 and Rs60.30, amid improved supply of dollar.

On March 22, the rupee gave up its overnight firmness due to rising dollar demand, and shed five paisa against the dollar, which was quoted at Rs60.30 and Rs60.35. The trading remained suspended on March 23, being public holiday on account of Pakistan Day calibrations. On March 24, the rupee continued its downtrend against the dollar and lost five paisa. The dollar in the local currency market was quoted at Rs60.35 and Rs60.40.

Against the European single common currency, the rupee picked up 40 paisa on the first trading day of the week in review and traded at Rs72.75 and Rs72.85 on March 20, after closing the previous week at Rs73.15 and Rs73.25. On the second day, the rupee managed to gain another 10 paisa against the euro to trade at Rs72.65 and Rs72.77 on March 21.

On March 22, the euro continued its downtrend as the managed to recover 15 paisa more on the third day trading at Rs72.50 and Rs72.60 on dollar’s handsome recovery in the international market. The market remained closed on March 23. The euro further lost 70 paisa on March 24, as the rupee continued to gain versus the European single common currency, which at Rs71.80 and Rs71.90. The rupee managed to recover 135 paisa against the euro this week.

In the international financial market, the dollar rebounded on March 20 from last week’s sharp losses after traders, eager for clues on the course of the US interest rates, squared up ahead of a speech by Federal Reserve Chairman. Last week the dollar fell two per cent against a basket of major currencies amid reduced expectations for how high the Fed will raise rates this year in the wake of tame inflation data.

Traders attributed the dollar’s partial recovery to profit-taking in other currencies, even as market sentiment on the greenback remained cautiously negative. The euro slipped 0.2 per cent from last week close to $1.2167, after reaching a seven-week high of $1.2207 last week.

Against the Swiss franc, the dollar was relatively unchanged at 1.2908 francs. Sterling was little changed at $1.7562.

Weighing on the dollar lately has been pressure on carry currencies generally, as rates in the key funding currency economies continue to raise a phenomenon one expects to continue, with a loss of US carry advantage re-exposing the US currency to long-standing structural vulnerabilities and reserve diversification. However, the dollar posted sharp gains against high-yielding currencies such as the Australian and New Zealand dollars.

The New Zealand unit fell to a 20-month low of the US $0.6236, taking its cue from a slowdown in the pace of economic growth there and a view the central bank’s next move could be to lower rates. The Australian dollar hit a 17-month low of the US $0.7180 after recording its biggest one-day drop in almost nine months at last weekend. The yen briefly spiked against the dollar after the Bank of Japan’s policy board member Atsushi Mizuno said it is not too early for a change in the monetary policy.

On March 21, the dollar climbed following the US bond yields higher as markets grew more confident the Federal Reserve will raise interest rates at least two more times in the next few months. A combination of generally positive comments on the US economy by Fed Chairman and a surprisingly large rise in February core US producer prices shoved yields higher. The market is getting more hawkish on the US rates right now and that’s helping the dollar and hurting the euro. The last three euro rallies have been driven by rate futures.

The euro was down 0.6 per cent against the dollar to $1.2089 but would have to decline to around $1.1915 to fully retrace its sharp rally last week. The dollar rose 0.8 per cent against the yen to 117.33 yen. Against the Swiss franc, the dollar was up 0.8 per cent at 1.3013 francs. Sterling, meanwhile, fell 0.5 per cent to $1.7473. For the past six months the euro has traded in a roughly $1.1640 to $1.2325 range.

On March 22, the dollar was slightly higher against the euro, but weaker against the yen as dealers took advantage of a quiet day on the US economic data front to consolidate positions. Investors last week sharply pared back their bets on how much further the Federal Reserve will raise interest rates this year, pushing the dollar to multi-week lows.

This week, however, traders shifted back toward the view that the US central bank will raise rates to five per cent by May and possibly higher after that following February’s strong core producer price and upbeat comments on the economy from Fed Chairman on March 20.

But with no fresh impetus, that rebound ran out of steam, allowing flows and stop-loss activity to push the dollar around in narrow ranges, with many looking to next week’s Fed meeting for direction.

The dollar was trading down 0.3 per cent on the day at 116.95 yen, having edged up as high as 117.40 yen earlier in the global session. The fall in dollar/yen dragged down euro/yen 0.4 per cent on the day to 141.25 yen.

Meanwhile, the euro was trading at $1.2075, down 0.1 per cent on the day, while the dollar was up 0.3 per cent against the Swiss franc at 1.3053 francs. Sterling was unchanged at $1.7475.

There are stop loss orders in euro/dollar building beneath $1.2060 and will likely be the catalyst for further euro/yen selling. This week rate futures have signified increased chances the Fed will lift borrowing costs to five per cent, giving the dollar some breathing room as both the European Central Bank and the Bank of Japan look to tighten credit conditions as well. This year may be the first since 2000 in which the United States, Japan and the euro area all grow at or above their potential.

On March 23, the dollar rose broadly taking its cues from rising the US bond yields and solid US housing data that seemed to suggest the Federal Reserve will likely raise interest rates at least twice more.

The euro fell nearly one per cent from a day earlier to $1.1956, just short of what traders said were large automatic sell euro orders just below $1.1950.

The dollar had its largest single-day increase against the Swiss franc since July 2005, rising one per cent to 1.3170 francs, while sterling slipped 0.7 per cent to $1.7352. The dollar was up 0.8 per cent to 117.90 yen. The yen however gave up those gains when the lawmaker, the US Senator Charles Schumer, in Shanghai on a conference call with reporters said the outlook was merely an observation and not based on any sort of agreement with China.

At the close of the week on March 24, the dollar clung to gains after a four-session winning streak powered by expectations the Federal Reserve will likely keep pushing up interest rates after an expected rise next week. Only last week the dollar had fallen sharply after soft inflation data suggested to some that the US central bank may be ready to take a break after next week’s expected rise.

The dollar hovered around 117.95 yen, up slightly from the level in late New York trade and more than two yen above a low on the opening day of the week. The dollar has shifted between 115.50 yen and 119.50 yen over the past two months. Traders said that Japanese exporters were waiting to sell dollars above 118 yen, seeking to lock in better hedging levels for the fiscal year beginning in April.

The euro was trading around $1.1970, barely changed on the day and still trapped well within the range of $1.18 to $1.23 that it has drifted in so far this year. Sterling hit a nine-day high against the euro as investors scaled back expectations for a British interest rate cut. Recent reasonably strong data and an on-hold tone taken by policymakers have enabled the pound to claw its way back from seven-month lows against the euro this week. It weakened to 11-day lows of $1.7311 earlier but hit the day’s highs of $1.7431.