May 8, 2006	Monday	Rabi-us-Sani 9, 1427

THE local currency market remained closed for Labour Day holiday on May 1. Trading in the market resumed on May 2. The inter-bank market observed a quiet week.

The rupee resumed trading on a firm note and remained unchanged throughout the week at Rs60.06 and Rs.60.07 versus the dollar, amid persistent demand for dollar. In the open market, the rupee, however, opened the week on a negative note shedding five paisa for buying and four paisa for selling to trade at Rs60.17 and Rs60.22 on May 2, after closing the previous week at 60.12 and 60.18. Strong demand for dollar persisted in the market and several buyers were seen in the market to purchase dollars.

The rupee continued to extend its overnight weakness versus the dollar in the open market on May 3, when it further lost three paisa, changing hands at Rs60.20 and Rs60.25. It, however, managed to recover versus the dollar on May 4, and gained two paisa for buying but remained unchanged for selling at Rs60.18 and Rs60.25. On May 5, the rupee further gained one paisa for buying and picking up three paisa for selling to trade at Rs60.17 and Rs.60.22, respectively. Over the previous weekend, the rupee this week lost five paisa for buying and four paisa for selling in the open market.

Versus the European single common currency, the rupee managed to recover 20 paisa on the week’s opening day trading at Rs75.15 and Rs75.20 on May 2. The rupee had closed last week at Rs75.35 and Rs75.45. On May 3, the rupee failed to maintain its firmness over the euro and lost 55 paisa, changing hands at Rs75.65 and Rs75.75 as the dollar weakened against the world currencies. It, however, recovered 30 paisa on May 4, and traded at Rs75.35 and Rs75.45. The single European currency recovered lost ground on the back of rise in its value globally on May 5, when the rupee failed to maintain its overnight firmness, and shed 15 paisa versus the euro to trade at Rs75.80 and Rs75.90. During the week in review, the rupee lost 45 paisa versus the euro.

In the international financial markets, the dollar recovered on May 1, gaining against the euro and paring major losses against the yen, after the CNBC television reported that the Federal Reserve chief had said that the Fed has a flexible, not a dovish, stance on monetary policy. The dollar’s move was swift as investors latched onto any indication that the Federal Reserve will not pause in its rate raising cycle after an expected 16th consecutive quarter-percentage-point hike to five per cent on May 10. Fed fund futures indicated a 42 per cent chance of a June hike, up from around a 30 per cent chance earlier in the day.

The euro, which earlier on the day hit a fresh one-year high of $1.2690, snapped a six-session winning streak, trading down 0.4 per cent on the day at $1.2585 late in the New York session. The dollar had earlier slipped to a fresh seven-month low against the yen of 112.34 yen but by late trading had pared those losses to last change hands at 113.31 yen - still down 0.5 per cent on the day. After the CNBC report, the dollar was last up 0.2 per cent against the Swiss franc at 1.2410 francs, while sterling was last at $1.8255, little changed from last week close.

The dollar has fallen to multi-month lows against most major currencies since Fed Chairman Ben Bernanke said last week in congressional testimony that the Fed might pause in raising interest rates. This was only days after the Group of Seven finance chiefs released a statement on currencies that many interpreted as a call for a weaker dollar. The euro got a lift from the Purchasing Managers’ Index for the euro zone, which in April hit its highest since September 2000. The euro-zone PMI showed robust factory activity and heightened expectations for a more hawkish tone from the ECB’s meeting later in the week, even if the bank leaves rates unchanged.

Late in New York, the euro was at $1.2615, up 0.2 per cent on the day, having hit a high of $1.2667 earlier, just off previous day’s one-year peak at $1.2690. Against the yen the dollar was little changed at 113.31 yen. Sterling gained 0.8 per cent to $1.8397 after a report showed Britain’s manufacturing sector unexpectedly grew at its fastest pace in 1-1/2 years last month.

On May 3, the dollar eased against major currencies as investors shrugged off strong US economic data and debated whether the Fed will soon pause in the current rate tightening cycle. Though the US currency spiked higher, paring losses after Japanese Finance Minister Sadakazu Tanigaki said that financial markets misunderstood a G7 statement which investors took as a call for the dollar to weaken, his comments were not enough to offset the bearish sentiment toward the dollar other than against the yen.

Two separate reports showing that the US services and manufacturing sectors were running at a robust pace also failed to push traders into letting the dollar rally too far because they have not changed their view that the Fed will soon pause in its rate-raising campaign. The dollar index, the dollar against a basket of currencies, has fallen almost three per cent in the last two weeks and remains mired at a 12-month low. It closed at 85.84.The dollar has been under heavy selling pressure since the Group of Seven finance chiefs’ statement on currencies last month, which traders interpreted as a thinly veiled call for the dollar to weaken.

The Australian dollar remained strong and was last up about 1.1 per cent on the day at $0.7701, after the Reserve Bank of Australia raised interest rates earlier for the first time in 14 months, by a quarter-point to 5.75 per cent. The New Zealand dollar pared gains then recovered after reports of an earthquake measuring 8.1 hitting the Tonga Islands. The quake initially prompted a tsunami warning for Fiji and New Zealand, although the Pacific Tsunami Warning Centre later cancelled the warning. Kiwi/dollar was last at $0.6418, up 0.4 per cent, though it had dipped as low as $0.6390. It remained well off the day’s high of $0.6444. Two US economic reports caused short-term action in the dollar.

On May 4, the dollar slid to a one-year low against the euro after the European Central Bank President Jean-Claude Trichet seemingly validated investor expectations for a euro-zone rate hike in June. The ECB earlier left rates unchanged at 2.5 per cent, as expected, but in an upbeat post-meeting statement, Trichet reiterated that the bank would need to exercise “strong vigilance” in setting monetary policy given the low level of interest rates and rising price pressures. Trichet did not mention the euro’s recent rise, limiting himself to noting that the Group of Seven finance chiefs’ recent communiqué on currencies did not signal any change in their view on the dollar. Any allusion to the euro’s recent strength could have acted as a drag on the single currency, but Trichet’s omission was seen as a green light to euro bulls.

The euro last traded at $1.2704, up 0.5 per cent on the day, after earlier hitting $1.2723 - its first time over $1.27 since last May - as Trichet’s mention of the word “vigilance” in his statement reinforced market expectations for another quarter-point rise in euro zone interest rates in June. Against the Japanese yen, the dollar was last at 113.61 yen, up 0.1 per cent on the day. The greenback fell 0.7 per cent against the Swiss franc to 1.2271 francs, near its eight-month low of 1.2250 francs struck earlier on the day. Sterling also hit a new 12-month high at $1.8549. The pound was last up 0.5 per cent at $1.8530.

At the close of the week on May 5, the euro was steady against the dollar within sight of a one-year high hit the previous day but stuck in a range ahead of key US jobs data later. The euro was boosted on May 4 by comments from the European Central Bank President Jean-Claude Trichet that supported market expectations it would raise interest rates in June from the current 2.5 per cent. The message was reinforced by the ECB Governing Council member Axel Weber, who said that “all options are always open” when asked about the possibility of raising rates by 50 basis points in June rather than just 25.

The euro was broadly flat on the day at $1.2688, having hit a one-year high of $1.2723 a day earlier. The euro briefly spiked against the dollar after Weber’s comments before retreating. Against the yen, the dollar was up a third of a percent at 113.91 yen and the euro was 0.25 percent higher at 144.61 yen. Elsewhere, the Australian dollar shed around a third of a percent against the US currency, retreating from Thursday’s eight-month high of $0.7729. Sterling vaulted to a one-year high against the dollar, building on gains as the greenback came under further heavy selling pressure after weaker-than-expected US employment data.

The pound has also been supported by recent upbeat data on the UK economy, particularly the housing market, which has extinguished calls for a cut in the cost of borrowing and many players now think the next move in rates could be a hike. Sterling had risen as high as $1.8623, jumping over a US cent from around $1.8492 before the payrolls data and hitting its strongest level since May 2005.