The Dollar manged to gain across the broad last week, as the US data increasingly started showing a “resurgent “ economy . The FED, again held rates steady last week and spoke about “inflation risks”. The markets are now busy scaling back expectations of a US rate cut. This is seeing the US Dollar gaining across the board.This morning the dollar was little changed, holding fast to gains made in the previous session thanks to a moderate rise in U.S. jobs and as investors awaited a meeting of Group of Seven finance officials later in the week.
The G7 meeting in Essen, Germany, on Feb. 9-10 is in the spotlight because European officials have been pushing for discussion of the yen’s weakness, although their Japanese and U.S. counterparts have been playing down the issue. Data on Friday showed that the U.S. economy added 111,000 jobs in January. The number fell short of expectations, but an upward revision to previous months indicated the economy was on a solid footing, helping keep the dollar near a four- year high against the yen hit a week ago.
The single European currency slipped from a one-month high against the dollar hit on Friday around $1.3075 thanks to a report by Market News International that “well-informed sources” had said the European Central Bank could refrain from raising rates for a while after its next rise.
The ECB holds a rate meeting this week at which it is widely expected to keep rates steady at 3.5 %. The decision is due on Thursday. There are also policy meetings by the Bank of England and the Reserve Bank of Australia, which are both expected to keep rates unchanged. The BOE’s decision is on Thursday and that of the Australian central bank on Wednesday.
Traders said this week’s G7 meeting in Germany and a lack of major economic data releases would likely keep currencies trading in tight ranges.
Though the ECB is likely to leave its 3.50% key lending rate on hold Thursday, it will probably signal plans for a hike in March. This would bringit closer to the Federal Reserve’s key rate of 5.25%, increasing returns for investors in euro- based assets.
On the U.S. side, there’s little data out this week to lend support to the greenback. Instead, traders may continue to digest recent U.S. economic reports as well as a Fed policy statement this week that was not as tough on inflation than dollar bulls expected.
Currency market chatter this week will likely revolve around the Feb. 9-10 meeting of the Group of Seven most industrialized countries in Essen, Germany.
Although much of the U.S. economic data in recent days has been positive -fourth quarter growth was 3.5%, well above expectations - there has also been apeppering of negative data, such as Thursday’s ISM manufacturing report that signaled a contraction in factory activity. In addition, the Federal Reserve left rates on hold for the fifth straight meeting and expressed less concern about inflation. This has not only shelved market hopes to start pricing in a Fed rate hike sometime this year, but it has revived near-dead talk about rate cuts, which could be a negative for the dollar.
Interest rates futures contracts Friday were giving a 64% of a Fed rate cut to 5% in the third quarter of 2007, from 40% odds at the beginning of this week.
Fed speakers - including Chairman Ben Bernanke, who is scheduled to give a speech Tuesday in Omaha, Neb. - are likely to reiterate this week’s Federal Open Market Committee policy statement. And analysts said he and other Fed officials may steer clear of talk about its more dovish inflation outlook, focusing instead on its belief that “recent indicators have suggested somewhat firmer economic growth.”
The only U.S. data out this week that traders will be watching is an Institute for Supply Management index of January non- manufacturing business activity, to be released today.
The Bank of England will also be announcing an interest rate decision Thursday, less than an hour before the ECB’s decision. The BOE is also expected to leave its key rate, currently at 5.25%, on hold.
Paulson Soothes G7 Jitters:
European officials, including Jean-Claude Juncker, the Luxembourg prime minister and chairman of the Eurogroup and German Finance Minister Peer Steinbrueck had reasonable success this week of talking the yen into a stronger position against the dollar and euro. The two officials said they were worried about its weakness - it’s 10% down versus the euro over the past 12 months - and suggested it should be a major topic of discussion at the G7 meeting.
But Treasury Secretary Henry Paulson threw cold water on these efforts Thursday when he said “the Japanese have a currency that is traded in an open, competitive marketplace based on economic fundamentals.”

W eek:February 05 - Fe brua ry 09 2007