The dollar slipped to a seven-week low against the euro in early Asia trade this morning as the U.S. currency came under pressure on renewed worries about Iran’s nuclear programme.
Traders said the dollar’s latest slip was partly due to the surge in gold and oil prices as Western powers were set to meet in London to discuss tightening sanctions on Iran over its nuclear programme amid a flurry of tough talk between Washington and Tehran. Gold prices, which tend to move inversely with the dollar, have jumped nearly 15 % from their lows in early January to near $700 an ounce. The dollar has mainly come under pressure on expectations for the Federal Reserve to trim rates from the current 5.25 % later in the year, even as the European Central Bank seems set to raise rates further next month to 3.75 % from 3.5 %. Little major economic data is set for release in the United States or Europe later in the session to help shape the outlook for rates.
The minutes of the Bank of Japan’s January meeting are likely to get only brief attention after the BOJ raised rates last week to a decade-high of 0.5 %. The yen slid to new record lows against the euro last week despite the BOJ’s move as the central bank is seen taking at least six months or more before lifting rates again.
Federal Reserve policy-makers on Friday indicated they are still wary about the potential upside risks to inflation despite signs that price pressures may be abating. The Fed has kept its benchmark interest rate steady at 5.25 % since June, in the hope that slower economic growth will curb inflation. Financial markets expect the central bank to cut rates later this year. Dallas Federal Reserve Bank President Richard Fisher, speaking in Los Angeles, said he would like to see inflation well below 2 %.Separately, San Francisco Federal Reserve Bank President Janet Yellen said the current U.S. inflation rate of a little over 2 % is at the upper end of her price stability range.
Despite somewhat hawkish rhetoric from the Fed policy-makers, market reaction was subdued as U.S. Treasuries rallied on concerns over the struggling subprime mortgage market and rising tensions with Iran.
We head into the busy data week. We are expecting durable goods, consumer confidence, existing and new home sales, preliminary fourth quarter GDP, Chicago PMI, personal income and manufacturing sector ISM. Aside from Chicago PMI and ISM, the market is not expecting dollar friendly data, especially at the beginning of the week. A drop in aircraft orders should weigh on durable goods orders while softer inventory data and downward revisions to non-residential and business investment could lead to a significant downward revision in GDP. Elsewhere, the pound was stronger against both the US dollar and Euro thanks to underlying strength in the fourth quarter GDP report. In fact, consumer spending was so healthy that it triggered cautious comments from Bank of England member Sentence who said that it was important for the central bank to keep demand under control, especially since inflation is coming back on-track. With oil prices creeping back up, another rate hike before the summer is not out of the question. In the week ahead, we are looking forward to a number of housing market related reports. This includes mortgage approvals and lending, the Hometrack and Nationwide house price reports, manufacturing PMI and money supply.

Week : February 26 - March 2 2007