December 25, 2006	Monday	Zilhaj 03, 1427

THE rupee/dollar parity commenced the week on a negative note as rupee’s weakness versus dollar persisted in the inter-bank market on December 18. The rupee slid four paisa against the dollar on short supply of dollars and increased corporate demand, changing hands at Rs60.92 and Rs60.94 against the previous week close of Rs60.88 and Rs60.90.

Bearish sentiment continued in the local currency market on the second day of the week in review. The rupee further slipped by two paisa as dollar demand kept it under pressure. The dollar traded at Rs60.94 and Rs60.96 on the inter-bank forex counter on December 19. The rupee, however, managed to hold its overnight levels in relation to dollar on December 20, when it traded at Rs60.95 and Rs60.96.

On December 21, the rupee recovered on improved supply of dollars, making fresh gains of four paisa to trade at Rs60.91 and Rs60.92 versus the dollar. However, on December 22, the inter-bank market witnessed a down trend in rupee/dollar parity, as the rupee unable to hold its overnight firmness came under pressure on high dollar demand and lost three paisa to trade at Rs60.94 and Rs60.95 at close. During the week as a whole, the rupee in the inter-bank market lost six paisa versus the dollar.

In the open market, the rupee remained unchanged for buying while it picked up five paisa in relation to the dollar for selling and traded at Rs61.00 and Rs61.05 on December 18, against Rs60.00 and Rs60.10 last weekend. The rupee did not show any change against the dollar on the second day, when it traded unchanged at Rs61.00 and Rs61.05 on December 19. The rupee maintained a firm trend against the dollar for the third day in a row on the buying counter while it shed two paisa on the selling counter and traded at Rs61.00 and Rs60.07 on December 20.

The rupee further picked up four paisa on the fourth day trading at Rs60.96 and 61.03 on December 21 due to increased inflow of remittances ahead of Christmas, New Year and Eid-ul-Azha. On December 22, the rupee further strengthened versus the dollar recovering seven paisa more. It traded at Rs60.87 and Rs60.97 on the fifth day of the week in review. This week, the rupee in the open market shed 87 paisa against the dollar amid fluctuations. The rupee this week continued to weaken versus the Euro, though on December 18, it extended its weekend firmness against the European single common currency, and gained 10 paisa to trade at Rs79.55 and Rs79.65 on the opening day of the week against the last weekend’s level of Rs79.45 and Rs79.65. On December 19, the second trading day, the rupee failed to hold its overnight firmness versus the euro and shed five paisa, changing hands at Rs79.60 and Rs79.70.

On December 20, the rupee continued its downtrend and recorded a sharp fall of 70 paisa, changing hands at Rs80.35 and Rs80.45, as the European currency jumped to record high in terms of the yen and it also posted fresh gain versus the dollar in the world market on the back of an upbeat survey of the German Business sentiment, increasing expectations for higher euro zone interest rates next year.

The rupee, however, managed to recover from past two days’ weakness and gained 31 paisa against the euro to trade at Rs80.04 and Rs80.10 on the fourth trading day of the week in review. The rupee picked up 19 paisa against euro and traded at Rs79.85 and Rs79.95 on the fifth trading day. When compared with the previous week close, the rupee shed 40 paisa for buying and 30 paisa for selling versus the European single common currency this week.

On the international front, the dollar slipped against the euro and was steady against the yen on the opening day of the week, with dealers squaring their books amid decreasing volume ahead of a Bank of Japan policy meeting. Despite the slow drying up of liquidity, there are a few events this week that could generate some volatility, including a policy meeting of the Bank of Japan and a handful of US economic data. The US Treasury will also release its semi-annual report on foreign exchange, days after Treasury Secretary Henry Paulson returned from China with no major breakthroughs on the value of the yuan.

Regarding Japan, few are expecting officials to lift Japanese interest rates from their current 0.25 per cent. However, some fear hawkish remarks from BoJ Governor Fukui could boost the yen and put pressure on yen-funded carry trades, which involve borrowing yen cheaply and then buying higher-yielding currencies. The dollar earlier posted modest losses after a government report said the US current account gap widened in the third quarter to 6.8 per cent of the US gross domestic product. But currency analyst at Bank of Tokyo Mitsubishi-UFJ in London, said, "yen buying on a hawkish statement is likely to be temporary."

The euro edged up 0.1 per cent from last week close to $1.3100 on December 18, above a session low of $1.3053, but well off a 20-month high of around $1.3365 touched on December 8. Against the yen, the dollar was relatively unchanged at 118.07 yen. Elsewhere, the euro hit a fresh 6-1/2-year high against the Swiss franc, shooting above 1.6010 francs, a move traders attributed mostly to technical factors. Sterling fell 0.2 per cent to $1.9480 as investors continued to take profits on the pound's recent appreciation. The British currency rose to a 14-year high above $1.98 earlier this month.

On December 19, the dollar fell against the euro after surprisingly strong German business sentiment report released overnight spurred traders to take out technical targets. A separate report showing a sharp rise in the US wholesale prices last month gave the greenback a brief boost, but dollar selling against major currencies soon resumed, partly because last week’s soft reading on the US consumer prices offset the data.

Traders apparently shrugged off a semi-annual report from the US Treasury Department, which declined to name China a currency manipulator but pressed for more flexibility in the yuan. While benchmark US interest rates is thought to be on indefinite hold at 5.25 per cent, markets are gearing up for another rate hike in early 2007 from the European Central Bank. The report that German business sentiment, measured by the Munich-based Ifo research institute, hit its highest in 15 years strengthened that view by suggesting that European companies have not been squeezed by the euro's recent gains.

Throughout the New York session, dealers pushed the euro up through technical levels around $1.3170 and $1.3210, hoping to trigger automatic orders to buy euros and sell dollars. The next technical obstacle for the euro was around $1.3250. The euro was up 0.7 per cent at $1.3190, while the dollar was relatively unchanged at 118.10 yen. Sterling jumped across the board after data showed the UK house prices rose in November for a 13th straight month, helping to cement expectations of higher interest rates early next year. It was up more than one per cent at $1.9686, making it one of the best performing currencies against the dollar this year with a year-to-date gain of 14 per cent.

Traders said investors who were stopped out of long euro and sterling positions due to a dollar rebound late last week were rushing back in to re-establish short dollar trades. The euro jumped 0.7 per cent to a record high above 155.85 yen after the Bank of Japan kept interest rates unchanged at 0.25 per cent, as expected, and BoJ Governor warned that domestic consumption and consumer price gains had softened Market players kept a close eye on developments in Thailand after the country's central bank announced regulations on foreign currency inflows designed to curb what it called speculation in the Thai baht.

That sparked the bath’s biggest fall against the dollar in 4-1/2 years on December 18 and sparked a nearly 15 per cent plunge in Thailand's benchmark stock index on December 19. In recent trade, the Thai baht was trading at 35.850 per dollar, near its multiyear low at 35.970 reached after the capital controls were announced. Some analysts worry other countries in the region may be tempted to follow Thailand's lead, for fear currency strength will make them less competitive with China, where the Yuan’s rise has been modest.

On December 20, the dollar gained amid light trading volume as dealers prepared for a possible rebound later in the week when US economic data are released. Trading was choppy during the New York session, driven mainly by automatic orders to buy dollars and sell other currencies, dealers said. Earlier in the session, the euro was unable to break above the $1.3250 area; sparking selling that later took it back down to a session low of around $1.3160. There were some offers up around $1.3250 (in the euro) so the market has just retraced a bit.

The euro remained up 0.1 per cent at 156.00 yen after hitting a record high overnight at 156.39 yen, according to electronic trading platform the EBS, while the dollar was up 0.3 per cent at 118.40 yen. Sterling hit a two-week high against the dollar and matched a 6-1/2 year peak on a trade weighted basis, underpinned by a series of strong data on UK mortgage lending and retail sales.