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Sans support, euro plumbs new lows

R. Janakiraman

MARKET expectations that the Group of 20 meeting in Montreal would at least express concern at the plunging euro were belied when the single currency's woes were not even mentioned in the joint communique. With weak economic data pressing the euro down, the fear of intervention by the central banks had alone kept the market from testing the pain threshold of the European Central Bank (ECB); with the intervention jitters receding, the market dumped the euro to a new life-time low of $0.8225 against the U S dollar and 88.97 against the Japanese yen on Thursday. The pound sterling followed the euro to the week's low of $1.4187 from a high of $1.4802 touched on October 13. The dollar moved in a narrow range of 1-1/2 yen against the Japanese currency with it s upside capped just above yen 1.09 per dollar.

The euro opened the week at $0.8420 and soon dropped to within 1/4 cent of last week's low against the dollar in the absence of signs of central bank intervention to support the euro. Italy's auction for next-generation mobile telephone licences raised o nly half the amount expected after BLU, the smallest of Italy's four mobile phone companies, withdrew from the contest. The lowering of the likely foreign inflows towards the licence fee added to the weakening trend of the euro.

Economic data emerging from the Eurozone did not help the currency. Euro-11 labour costs in the second quarter were revised upwards on Monday to 3.7 per cent over the year from 3.5 per cent earlier. Germany's ICON consumer sentiment slipped to 96.0 in Se ptember from 100.0 in August. German September PPI posted a rise of 0.9 per cent over the month, while the Consumer Price Index showed a stronger rise of 2.3 per cent over the year in October.

Eurozone industrial production for August disappointed with only a 0.2 per cent rise over the month while consumer spending in France registered a fall of 1.2 per cent over the month in September. A biannual economic report from Germany's six leading eco nomic institutes confirmed suspicions that Euroland was more vulnerable to oil price rises than the US and even Japan.

The G-20 meeting of finance officials in Montreal on Wednesday and Thursday was not expected to produce any quick-fix solutions for the euro's woes but the market expected that there would, at least, be a mention of G-20 concerns on the euro exchange rat e. The meeting, however, ended without any mention of the euro or intervention.

The US Treasury Secretary, Mr Lawrence Summers, said the G-20 talked informally about the euro but there was no focussed discussion on any particular exchange rate. With the US apparently not ready to join in an intervention, the market was emboldened to test the pain-threshold of the ECB regarding the euro. The currency caved into a fresh low of $0.8246 on Wednesday and further down to a new record low of $0.8225 on Thursday.

Rumours of the liquidation of large euro-denominated assets by Japanese insurers and another rumour _ later denied _ that the Dutch ING was bidding to acquire Bear Sterns of the US added to the pressure on the euro.

The euro thereafter showed a small recovery. Two factors lent some support to the single currency. One was Iraq's demand that its oil exports (accounting for 4 per cent of the world's supply) should be denominated and paid for in euros instead of dollars . Iraq threatened that to suspend its UN-controlled oil exports beginning next Wednesday unless the demand was conceded. The second was a wild rumour that the US Fedreserve Chairman, Mr Alan Greenspan, would soon retire.

The euro was trading just below the $0.83 level on Friday. The market sees a possibility of the ECB intervening to support the euro later on Friday if it falls below Thursday's lows: if that does not come about, the euro is likely to face severe pressure next week.

Against the Japanese currency, the dollar opened at yen 108.88 on Monday and was dragged down to yen 108.15 on euro sales for yen. Traders reported increasing whispers of massive forex losses at some Japanese institutions, particularly insurance companie s.

These entities, which had invested heavily in euro-denominated assets soon after the euro's launch, now find that their investments have so shrunk in value in yen terms that the investors' very existence is threatened. If they liquidate their foreign hol dings, the large repatriation demand for yen would pull down the euro, dollar and sterling.

The dollar-yen rate moved in a narrow range this week between yen 107.60 and yen 109.07 and was ruling around yen 108.50 on Friday.

Britain, as a net exporter of oil, is seen as being in a better position to withstand the escalating oil costs. It strengthened to $1.4802 on September 29. Although the pound has been gaining against the euro and hit a 5-month high of 0.5770 against the euro last Monday, it has shed its gains against the US dollar in the recent week. After opening at $1.4505 against the dollar on Monday, sterling rose to the week's high of $1.4581 but gave up its gains on Tuesday when it came under pressure on the Bank of England Governor, Mr Eddie George's comment that the pound was substantially overvalued, particularly against the euro.

Britain's global trade deficit came slightly better at 2.27 billion in August against a forecast of a deficit of pound 2.7 billion. But the UK recorded its first surplus in five years with the Eurozone, amounting to 31 million in August, against the fore cast of a deficit.

The pound derived some support from these figures but when the euro fell against the dollar, the pound also followed suit and weakened to $1.4187 on Thursday. It recovered later to the $1.43 level on rumours of Mr Greenspan's resignation. On Friday, the pound continues to trade around the same level.

The exchange rates ruling in Europe in the forenoon of Friday were: $0.8321 to the euro and $1.4340 to the British pound; and DM2.3505, yen 108.53 and SF 1.8160 to the dollar.

Re also hits a new low: The rupee had a difficult week. It opened on Monday at Rs 46.3450/3650 to the dollar and strengthened initially on the inflow of accumulated week-end dollar supplies. It touched the week's high of Rs 46.3350/3450 on that day.

Thereafter, it was a gradual one-way downward move for the rupee. Increasing oil prices, Iraq's threat to suspend oil supplies, the weakness of the stock markets, the continuing outflow of FII funds and the weakness of the South-East Asian currencies all had their impact on the rupee. There was no prop-up through the interest rate segment, as the RBI continued to cut the repo rate which came down to 8.0 per cent on Thursday.

Barring Thursday, which was a holiday for Deepavali, the rupee hit new record lows everyday in the past week: to Rs 46.4350/4450 on Tuesday, Rs 46.64/66 on Wednesday, and Rs 46.7850/8000 intra-day on Friday. There was, however, no panic in the market thi s time as the operators, observing the euro's fall against the dollar and the resultant appreciation of the rupee in real terms (REER), were anticipating a slide of the rupee against the US dollar. At the close of business on Friday, the rupee was quoted at Rs 46.7450/7550, a new record close.

In the forward sector, the dollar premia firmed up slightly on Monday on month-end roll over demand. Later in the week, while the falling spot rate tended to push up the forwards, RBI's action in reducing the repo rate by 25 basis points each to 8.25 per cent and 8.00 per cent on Tuesday and Wednesday respectively, capped the rise in the premia. On Friday, the premium on 6-months' forward dollar was quoted at 101 paise, or 4.3 per cent annualised.

Call money rates moved in a narrow range this week. After rising to 9.25 per cent on Monday, they softened after the RBI's repo rate reductions and closed on Friday at 8.25-8.50 per cent p.a.

The foreign currency assets of the Reserve Bank showed a fall of $298 million in the week ended October 13 and stood at $32.206 billion as on that date.