May 22, 2006	Monday	Rabi-us-Sani 23, 1427

LOCAL currency market commenced the week on a bearish note, as banks were engaged in extensive buying of dollar to meet the payment requirements.

On May 15, as a result of strong dollar demand, the rupee lost three paisa for buying and slid four paisa for selling, changing hands at Rs60.05 and Rs60.07 in the inter-bank market. Last week, the market had closed at Rs60.02 and Rs60.03 versus dollar.

On May 16, the rupee managed to hold its overnight levels, despite bullish dollar demand by corporate sector and traded unchanged at Rs60.06 and Rs60.07 on easy dollar supply. Falling trend in the dollar’s value in the overseas markets helped the rupee to reverse the trend versus the greenback in the local inter-bank market on May 17, where the rupee managed to recover 16 paisa for buying and another seven paisa on the selling to trade at Rs59.90 and Rs60.00 on continued dollar supply.

Firmness prevailed on May 18. However, the rupee lost six paisa for buying but recovered three paisa for selling to trade at Rs59.96 and Rs59.97. On May 19, the rupee did not show any change against the dollar for buying while it shed one paisa for selling changing hands at Rs59.96 and Rs59.98. During the week as a whole the rupee in the inter-bank market managed to gain six paisa for buying and five paisa for selling against the dollar.

In the open market, the rupee lost 14 paisa versus the dollar on the opening day of the week trading at Rs60.34 and Rs60.38, against last week close of Rs60.20 and Rs60.25 on May 15. The rupee continued its overnight weakness over the US currency, further losing seven paisa for buying and 14 paisa for selling to trade at Rs60.40 and Rs60.45 on May 16. As the demand for dollars persisted on May 17, the rupee failed to trim its losses and shed two paisa for buying and one paisa for selling to trade at Rs60.42 and Rs60.46.

On May 18, the rupee in the open market staged a recovery over the American currency and gained four paisa, changing hands at Rs60.38 and Rs60.42. The rupee further recovered five paisa against the dollar for buying and four paisa for selling, changing hands at Rs60.33 at Rs60.38 on May 19.Over the week in review, the rupee in the open market shed 13 paisa against the dollar.

Versus the European single common currency, the rupee, however, gained 16 paisa trading at Rs77.20 and Rs77.30 on May 15, compared to previous weekend’s Rs77.36 and Rs77.46. The rupee further extended its gains versus the euro on May 16, picking up another 25 paisa to trade at Rs76.95 and Rs77.05.

On May 17, the rupee failed to hold ground versus the euro and lost 50 paisa, changing hands at Rs77.45 and Rs77.55 following the dollar’s fall in the international markets. The rupee, however, gained 75 paisa and traded at Rs76.70 and Rs76.80 on May 18. The rupee again lost its overnight firmness against euro slipping 30 paisa on May 19, to trade at Rs77.00 and Rs77.10. Against the previous week close, the rupee this week managed to gain 36 paisa versus the euro, amid fluctuations.

In the international financial markets, the dollar gained broadly on May 15, staging its largest one-day rally versus the euro in a month, as a sharp fall in gold and other commodity prices gave the greenback some respite from its relentless bear trend. Concern that a potential commodities bubble could dampen economic growth caused spot gold to take its biggest one-day fall in over six years, while an index of a basket of commodities registered its largest daily decline in almost 20 years.

But traders managed to shrug off nagging worries about the outlook for slower US growth and plateauing interest rates, which saw the euro make its largest daily fall since last July. In New York, the euro was down over a per cent on the day to $1.2787. The dollar was up 0.2 per cent on the day against the yen at 110.35 yen.

The US crude futures also fell in line with the slide in other commodities as investors feared recent high prices could slow economic growth.

The Fed raised rates for the 16th time in a row last week to five per cent and said it may need to rise further to curb inflation. Aside from a brief spike lower, the dollar shrugged off data that showed a drop in overseas flows of capital. Net flows of capital into US assets fell to $69.8 billion in March, lower than analysts’ expectations of $75.50 billion. But that hardly made a dent on the dollar’s gains, as it was sufficient to cover the US trade deficit of $62 billion for that month.

The dollar’s upward correction continued, and against the Swiss franc, the greenback was up well over a per cent at 1.2126 francs, while sterling was down 0.8 per cent at $1.8799 in its biggest one-day drop since early February.

The dollar weakened on May 16, after data on US housing and producer inflation suggested US interest rates may not need to rise much further after two years of non-stop increases. Producer prices excluding food and energy rose 0.1 per cent last month, half the rate that had been forecast, while April housing starts came in at a 1.849 million-unit rate, below analysts’ expectations of 1.95 million, aside from a relief rally a day earlier in line with a sharp fall in commodities prices, the dollar has been unable to sustain a rally, even on the back of seemingly positive economic data.

The euro was up nearly 0.5 per cent against the dollar at $1.2855. The single currency offered almost no reaction to comments from Venezuelan President, who said Caracas might consider pricing its oil in euros after Iran said it was mulling using the euro instead of the dollar to price its oil exports. From a technical perspective, the euro is facing some headwinds, analysts say, and daily charts suggest a correction is under way even though the currency is still in a rising trend.

Earlier, European Central Bank Governing Council member Christian Noyer said the euro’s rate against the dollar had remained in limited ranges in recent years and noted that Asia was the region where more currency flexibility was seen as desirable. That took the pressure off the dollar at least against the euro. It (the pressure) remained against the yen and some of the yen crosses are all heavier after Noyer’s comments. The dollar was last down 0.7 per cent against the yen at 109.73 yen. Against the Swiss franc, the dollar was down 0.3 per cent at 1.2071 francs, while sterling was up 0.4 per cent at $1.8875.

The dollar rallied on May 17 after French Finance Minister spooked euro bulls by saying “everything” must be done to stop the single currency from rising too much against the greenback.

He reportedly said the euro zone economy could withstand a stronger euro but signalled that further strong gains would be unwelcome. This deterred euro bulls from pushing the currency through the psychologically important $1.30 barrier and accelerated a sell-off that spilled into sterling and the yen. Euro area forex policy is a bit different from the US and Japan. The ECB plays a relatively greater role in terms of deciding intervention vis-a-vis the Fed or the BoJ but the finance ministers’ comments still matter.

The euro had fallen about 0.8 per cent against the dollar to $1.2756. Volatility in emerging markets and declines in commodities such as gold and oil also supported the dollar, as risk-aversion temporarily whetted investor appetite for dollar-denominated assets, analysts said. Gold fell below $700 an ounce after nearly rising 4 per cent from the last New York close, while US oil futures were below $69.00 a barrel.

The dollar was also up well over a per cent on the yen, at 110.91 yen after hitting an eight-month low at 108.96 yen earlier in the global day, in its largest one-day rise against the Japanese currency since June. Against the Swiss franc, the dollar was up 0.5 per cent at 1.2135, francs while sterling fell 0.2 per cent to $1.8842. Traders said investors took profits in sterling above $1.90. The dollar had been under pressure across the board earlier in the day even though data showed US consumer prices, excluding food and energy, rose 0.3 per cent in April, higher than market expectations for a 0.2 per cent increase.

On May 18, the dollar staged a broad fall giving up the previous day’s gains after US Treasury Secretary John Snow again urged China to increase the yuan’s flexibility.

At the close of the week on May 19, The dollar edged up against the yen erasing earlier losses on upbeat Japanese growth data, as investors felt that the dollar’s sell-off in the past month may have gone far enough for now. The yen initially rose after data showed gross domestic product in Japan grew 0.5 per cent in January-March from the previous quarter due to resilient capital spending and domestic demand, beating market forecasts for a rise of 0.3 per cent.