July 24, 2006	Monday	Jumadi-ul-Sani 27, 1427

THE rupee/dollar parity remained fluctuated in the local currency market this week. Divergent trend was seen in the local currency market on July 17, amid tight supply of dollars.

The rupee commenced the week on a positive note, as it managed to recover some losses on the back of modest demand for the dollar. It traded at Rs60.26 and Rs60.28 in the inter bank market, gaining three paisa on its last week close of Rs60.29 and Rs60.31.

However, the rupee overnight firmness versus the dollar proved short lived, as it lost two paisa on the second day of the week in review, changing hands at Rs60.29 and Rs60.30. Importers rush to buy dollars exerted some downward pressure on the rupee and fuelled demand for the American currency on July 18. The rupee remained unchanged versus the dollar on the third day and traded at its overnight levels of Rs60.28 and Rs60.30 on July 19, amid low demand.

On the fourth day of the week in review, the rupee failed to maintain its overnight firmness against the dollar and shed three paisa. Tight supply position pushed the rupee’s value down amid rising demand for the US currency on July 20, when it traded at Rs60.32 and Rs60.33. On the fifth day of the week in review, rang-bound trading was witnessed in the inter bank market and the rupee did not move sharply versus the dollar trading at Rs60.30 and Rs60.32. Over the previous week close, the rupee this week lost only one paisa against the dollar.

In the open market, the rupee failed to maintain its firmness versus the dollar and slipped three paisa on July 17, to trade at Rs60.73 and Rs60.78 against last week’s Rs60.70 and Rs60.75. It extended its weakness versus the dollar on July 18, as the rupee shed ten paisa in a single day slide and traded at Rs60.83 and Rs60.88. But on July 19, the rupee shrugged of its overnight weakness and recovered three paisa versus the dollar, which was seen changing hands at Rs60.80 and Rs60.85.

On July 20, the rupee managed to recover 20 paisa for buying and 15 paisa for selling to trade at Rs60.60 at Rs60.70 versus the dollar. However, the rupee failed to maintain its firmness in the open market on July 21, dropping 10 paisa to trade at Rs60.70 and Rs60.80, as continued demand for dollars did not allow the rupee to hold its firmness. The rupee in the open market gained five paisa versus the dollar.

Versus the European single common currency, the rupee shed 11 paisa and traded at Rs76.64 and Rs76.74 on the first day of trading after the rupee had closed last week at Rs76.53 and Rs76.63. On the second day of trading, the rupee, however, managed to recover 44 paisa and traded at Rs76.17 and Rs76.27. The rupee further picked up 33 paisa on the third day of trading when the euro was quoted at Rs75.85 and Rs75.95. The rupee, on the fourth day of trading, lost 45 paisa. It traded at Rs76.30 and Rs76.40.

Finally towards the close of the week, the rupee shed five paisa versus the euro and traded at Rs76.35 and Rs76.45 on the fifth day of the week in review, as policy makers could not give the significant sign of further rise in the US interest rate in the near future and the dollar gave up its firmness in the international markets. During the week, the rupee, managed to recover 18 paisa against the European single common currency amid fluctuations.

In the world markets, the dollar jumped one per cent against major European currencies on July 17, when it hit a three-month high versus the yen as rising the Mideast tensions drew investors to the world’s premier reserve currency. Economic data also supported the dollar. A report that showed US factory output rising at twice the forecast pace in June lifted the currency to its session peak against the euro. But for now, analysts said, news on the economy was taking a back seat to Israel’s ongoing offensive against Hezbollah guerrillas in Lebanon.

Strategists said that while there was little sign of big flows out of risky assets and into safe havens such as the US Treasuries, rising tensions prompted investors to buy back dollars to cover short positions. The dollar index, which measures the US currency against a basket of major currencies, rose one per cent to 86.97, its biggest one-day gain in five weeks. The fighting may also have led US investors to sell some foreign stocks, supporting the dollar as they bring the proceeds back home, UBS said in its daily note to investors. The MSCI World stock index fell for a fifth straight session to its lowest level in a month.

In New York, the euro was on track for its worst day in more than a month, down one per cent to $1.2521. The single currency had risen as high as $1.2861 earlier this month before the Middle East flare-up. The yen was broadly weaker extending previous weekend’s losses after the Bank of Japan raised interest rates for the first time in six years but hinted it was in no hurry to hike again. The dollar rose 0.9 per cent to 117.15 yen. The yen hit eight-year lows versus sterling and the Swiss franc. Rising global tensions should continue to support the dollar, but analysts said investor focus would likely drift back to the economy as activity heats up on the domestic side.

The Fed has raised rates 17 straight times since mid-2004, and the market is split on the chances of a move to 5.5 per cent at the central bank’s August policy meeting. Sterling hit its lowest level in over two weeks against a firm dollar in London, with strong housing data failing to shake expectations for British interest rates to stay on hold at 4.5 per cent. It was down 1.07 per cent against the dollar at $1.8177, hitting levels last seen at the end of June

On July 18, the dollar rose to near three-month highs after a report showing higher US producer prices in June suggested the Federal Reserve may keep lifting interest rates to combat inflation. The greenback also gained as data showed the United States attracted a net $69.6 billion of capital inflows in May, more than enough to cover that month’s trade deficit of $63.8 billion. But the dollar pared gains slightly in late trade as investors moved to the sidelines ahead of consumer price data release and Fed Chairman Ben Bernanke’s semi-annual testimony before Congress. The market will monitor both events closely, hoping they shed light on the path of the US interest rates.

In New York, the euro was down 0.1 per cent on the day against the dollar at $1.2505, after touching $1.2473, it’s lowest since April 27. The dollar was up 0.33 per cent against the Swiss franc at 1.2522 after hitting a three-month high at 1.2557 earlier. Against the yen, it was up 0.15 per cent on the day at 117.35 yen, above the previous day’s three-month peak. Sterling rose 0.43 per cent to $1.8265 after data showed a large rise in the UK consumer prices, suggesting the Bank of England may lift interest rates this year.

Traders said the dollar’s advance was partly technical in nature, triggered by automatic dollar buy orders, and noted the market initially appeared to brush off the data. Indeed, the greenback’s advance ran out of steam as the market turned its attention to CPI and Bernanke. The Fed chief is expected to stick closely to the tone of the statement released after the Fed’s last meeting when the central bank said it expected slower growth to help moderate price pressures.

On July 19, the dollar fell sharply against the major currencies after Federal Reserve Chairman Ben Bernanke said the central bank expects inflation to ease as the economy slows. Speaking before the Senate Banking Committee, Bernanke said he expects core inflation, which removes food and energy costs, to fall in the coming quarters.

That cooled expectations that the central bank will raise interest rates next month, lifting the euro about a cent and a half against the dollar during the New York session.

In New York, the euro was up 0.75 per cent on the day at $1.2599 after climbing as high as $1.2610. Earlier, the dollar surged to its highest level since late April against the euro, yen and Swiss franc after data showed core consumer prices rose 0.3 per cent in June, above economists’ 0.2 per cent forecast. The euro hit a three-month low of $1.2456 shortly after the CPI release. The dollar was down 0.4 per cent to 116.82 yen, off its session low of 116.65 but still well above 117.88, a three-month peak touched after the CPI report. The greenback also fell 0.45 per cent to 1.2469 Swiss francs, off a peak of 1.2597 francs.

Sterling hit a four-week high against the euro, as investors continued to bet on higher UK interest rates despite minutes from the latest Bank of England meeting that pointed to steady borrowing costs. It briefly fell against the euro after the minutes of the July meeting showed all seven current Monetary Policy Committee members voted to keep rates unchanged and no arguments were raised either for a hike or a cut in rates.

But the pound quickly rebounded as the minutes did not take into account strong inflation data that has prompted some banks to forecast a rise in rates before the end of the year. It was trading at $1.8258. It fell around half a cent from a session high of $1.8293 after the minutes were released. Bear Stearns International has revised its UK interest rate forecast to a rise in 2006 from a hike in the first quarter of 2007.

On July 20, the dollar continued its slide against the euro as minutes from the Federal Reserve’s last policy meeting showed policy-makers saw “significant uncertainty” about the path of interest rates. That bolstered expectations that the central bank may be nearing the end of a rate-hiking campaign that began in 2004. The rate-setting Federal Open Market Committee lifted rates by a quarter points to 5.25 per cent - its 17th straight increase - at its meeting on June 29.

The Federal Reserves Board Chief told the Senate Banking Committee that the US inflation was likely to ease in coming quarters as the economy slows, and he repeated that message to the House Financial Services Committee. That dented the confidence of dollar bulls who expected the Fed to prolong its tightening campaign to combat inflation. In New York, the euro was up 0.3 per cent on the day at $1.2630. Sterling was up 0.35 per cent at $1.8477. Against the yen, the dollar was little changed at 116.87, well off a three-month high of 117.88 hit earlier in the week.