All Eyes On US Rate As Dollar Faces Pressure

London, May 30 | Updated: May 31 2004, 05:30am hrs
As the dollar continues to face downward pressure, mainly on account of a disappointing US data, uncertainty has increased as to how much US interest rates need to rise.

The dollar had hit an eight-week low against the euro and a three-week trough on the yen on Friday. Analysts said disappointing figures for US jobs and economic growth released on Thursday had sparked a liquidation of long-dollar positions that had been piling up on expectations the Federal Reserve would raise interest rates in June making returns on the greenback less unattractive.

Investors are awaiting more US data releases due later, manufacturing survey and a final reading of the University of Michigan consumer sentiment survey ahead of a three-day weekend in Britain and the United States.

What we are seeing is a reaction to softer than expected data that has come through since the start of May, which has led US interest rate expectations down, said Shahab Jalinoos, senior currency strategist at ABN Amro.

Today we have some pretty important numbers Michigan confidence and Chicago PMI - but the tendency since early May has been for the numbers to disappoint. As the dollar fell, the yen was helped by the Nikkei stock average which ended up 1.29 per cent on Friday, after gaining 1.85 per cent in the previous two days.

Some market players said the dollar also came under pressure from US investment banks buying of yen ahead of a revision in the Morgan Stanley Capital Investment global equity index that will take effect at the end of Friday. Swedens central bank left rates unchanged as expected.

A flash estimate of harmonised inflation for the euro zone in May, due later, forecast at an annual 2.4 per cent.

US Economy And Oil
The markets are also focused on the release this week of US jobs data for May, for more clues on the pace of possible US interest rate hikes. The Federal Reserve of Dallas said on Thursday that the need for short-term interest rates to eventually rise did not necessarily mean they should increase immediately or sharply. After having risen on expectations of an interest rate increase and a strong US economic recovery, the dollar remains in an adjustment phase, said Mitsuru Yaguchi, economist at Mitsubishi Securities in Tokyo.

Near record-high oil prices have also raised concerns that US economic growth could slow down and delay a rate rise. Oil prices slipped below $40 a barrel on Friday however ahead of an Opec meeting next week where oil ministers are expected to agree a rise in crude supplies. In Japan, the nationwide core consumer price index fell 0.2 per cent in April from a year earlier, in line with expectations, while the seasonally adjusted unemployment rate was unchanged at 4.7 per cent in April, also in line with economists forecast.