April 24, 2006	Monday	Rabi-ul-Awwal 25, 1427

Normal trading in currencies resumed in the local currency market on April 17. Trading activities had remained disturbed almost throughout the preceding week due to law and order situation in Karachi.

In the inter-bank market, the rupee opened the week on a quiet note. It showed a stable trend over the previous week close and traded versus the dollar unchanged at Rs59.95 and Rs59.96, amid low trading activity. Bearish sentiment persisted on April 18, though rising demand by the importers pushed the rupee down by four paisa for versus the dollar, changing hands at Rs59.98 and Rs60.

On April 19, the rupee extended its overnight losses on increasing dollar demand by importers but strong supply of dollars helped the rupee minimise its losses. The rupee further shed four paisa against the dollar closing the day at Rs60.02 and Rs60.04. Slight improvement in the dollar supply position supported the rupee to recover lost ground on April 20. The rupee managed to gain two paisa and traded at Rs60.00 and Rs60.02. Balanced demand and supply did not allow any unusual increase in the dollars’ demand in the inter-bank market on April 21. The rupee maintained its overnight level trading at Rs60.00 and Rs60.02 amid low trading. During the week in review, the rupee cumulatively lost five paisa versus the dollar.

In the open market, the rupee strengthened its ground on balanced demand and supply position of the dollar and gained five paisa to trade at Rs60.05 and Rs60.10 on the opening day, against previous week close of Rs60.10 and Rs60.15. On the second day of the week in review, however, the rupee was down by five paisa against the dollar, which was seen changing hands at Rs60.10 and Rs60.15 on April 18. The rupee, however, managed to pick up two paisa against the dollar on the third day of the week in review and traded at Rs60.08 and Rs60.13 on April 19.

On April 20, the rupee failed to hold ground and gave up its overnight firmness, losing four paisa against the dollar to trade at Rs60.12 and Rs60.17 on the fourth day of the week. The rupee continued its weakness on April 21, and lost three paisa versus the dollar to close at Rs60.15 and RsRs60.20 on the fifth day of trading. During the week, the rupee in the open market lost five paisa versus the dollar, amid fluctuations.

The rupee failed to maintain its rising trend versus the euro on the week’s opening day, as the single European currency managed to gain strength on the back of dollar’s weakness in the international markets. The European single common currency was seen trading at Rs72.65 and Rs72.75 versus the rupee on April 17, after gaining 35 paisa against previous week close of Rs72.30 and Rs72.40.

The rupee further lost 25 paisa on April 18, changing hands at Rs72.90 and Rs73.00 versus the euro. On April 19, the rupee extended its erosion versus the euro, shedding 60 paisa to trade at Rs73.50 and Rs73.60 after dollar hit a seven-month low against euro in the world markets, extending losses made after minutes of the Federal Reserve’s March meeting suggested the central bank was close to ending a two-year run of raising interest rates.

The rupee did not show further change and remained traded at Rs73.50 and Rs73.58 on April 20, after steep rise in the value of the single European currency. On April 21, however, the rupee was unable to maintain its overnight firmness versus the European single common currency and lost 10 paisa changing hands at Rs73.60 and Rs73.70 on the fifth day of the week in review. Over the previous week close the rupee lost 130 paisa versus the euro this week.

In the world markets, the dollar retreated in thin Easter holiday trade on April 17, hurt by worries the Federal Reserve will soon draw curtain on a nearly two-year campaign of raising short-term interest rates. The dollar posted sharp losses as growing concerns that the cycle of raising US interest rates may be ending offset news of strong capital flows into the United States. The dollar was also undermined by a weaker-than-expected reading of manufacturing activity in New York, as well as rising geopolitical tensions over Iran’s nuclear ambitions, traders said.

Dollar sentiment was also dampened by a report in The Wall Street Journal that said some Federal Reserve officials are not convinced they need to keep raising interest rates beyond an expected move in May. While there was nothing particularly surprising, analysts said with several markets in Europe closed for a long weekend, investors placed added emphasis on the report. Adding to the dollar’s woes was data showing a decline in US home builder sentiment this month to its lowest since November 2001. The data reflected a steep slowdown in home sales, and was certainly sharper than the Fed would like, analysts said.

A US Treasury Department report earlier in the session that showed net capital inflows of $86.9 billion in February - more than enough to cover the country’s $65.7 billion trade deficit in that month - initially appeared to stem dollar selling, though the report’s impact quickly faded. Analysts had expected net inflows of $62.8 billion. Later comments from Chicago Fed President, who is not a voter on the FOMC this year, saying inflation is near the upper end of its price stability range and that monetary policy must be vigilant, did little to support the dollar either.

The euro broke above $1.22 to trade as high as $1.2289, and by late afternoon was up 1.2 per cent at $1.2253. Against the Japanese yen, the dollar fell 0.8 per cent to 117.79 yen. The dollar was off 1.4 per cent against the Swiss franc at 1.2795 francs, while sterling was up about 1 per cent on the day at $1.7691.

On April 18, the dollar weakened as softer-than-expected US economic data and the minutes of last month’s Federal Reserve policy-makers’ meeting signalled that US monetary tightening is nearing its end. Most members thought the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy. The Fed raised US interest rates by a quarter-percentage point in that meeting, its 15th rate increase since June 2004.

Analysts also said dollar sentiment would likely remain negative as tensions over oil producer Iran’s nuclear program sent oil prices to record highs and gold to a fresh 25-year peak. The euro rose to near two-week highs against the dollar around $1.2328 just after the release of the Fed minutes, up 0.6 per cent from the previous day close. Against the yen, the dollar fell to near two-week lows at 117.26, down 0.4 per cent on the day. The dollar slid 0.6 per cent against the Swiss franc to 1.2716 francs. It earlier hit a roughly three-month low around 1.2710 francs. Sterling rose 0.6 per cent to $1.7805.

On April 19, the dollar fell to seven-month lows against the euro as a bigger-than-expected rise in core US consumer prices failed to shake expectations that interest rate hikes will soon end. That outlook was further bolstered by comments from San Francisco Federal Reserve President. In an interview on CNBC, she said that with US growth expected to slow and inflation expectations contained, the Fed is pretty close to being done with its string of rate increases. Her remarks were consistent with the tenor of the minutes of last month’s Fed policy meeting.

Also Chinese President Hu Jintao, on the second day of a five-day trip to the United States, said China’s objective was to increase flexibility of the exchange rate between the yuan and dollar. But he gave no details. His remarks had marginal impact on the market, with analysts disappointed that he did not say more. It seems clear that the Chinese will pursue their policy. They are going to resist international pressure and will modify their currency regime according to their own schedule.

Earlier, the release of data showing a rise in the core US consumer price index briefly lifted the dollar from multi-month lows against major European currencies. But the gains soon faded as investors decided one economic report alone would not alter the Fed’s thinking. Even though CPI was a little warmer than expected, the market has come to the realisation that interest rate hikes are coming to an end and a major pillar of support for the dollar has been removed.

The euro rose to seven-month peaks around $1.2394 before edging back to $1.2383 in late trading, still up 0.3 per cent from late April 18.

The euro also hit a record high against the yen at 145.45 yen, but last traded at 145.02, still up 0.3 per cent on the day. Traders said strong buying from Japanese investors fuelled a technical upward move in this currency pair. The dollar traded flat against the yen at 117.12 yen, after climbing as high as 117.95 yen. Against the Swiss franc, the dollar fell 0.2 per cent to 1.2664 francs. The dollar climbed as high as 1.2760 francs after the CPI report, though it traded at a three-month low of 1.2666 prior to its release. Sterling was last up 0.5 per cent at $1.7923 after it vaulted to about a three-month peak around $1.7935. Minutes from the Bank of England Monetary Policy Committee’s last meeting showed a 7-1 vote to keep rates steady at 4.5 per cent.