US dollar

US stepped into the year 2003 with a chilly start, intensified by the September 11 terrorist attacks on the World Trade Center. US dollar was on the defensive against most major currencies as the investors were wary of terrorist attacks, uncertainty over the duration Iraq War and huge current account deficit of USD 500 bio. The low yield of the Greenback also failed to attract the investors, who continued to shift their assets from United States.

Federal Reserve kept the interest rate unchanged for most of H1 despite the prediction of rate-cut. But on June 25, members of the Federal Reserve's rate-setting Open Market Committee lowered the overnight bank lending rate by a quarter percentage point to 1.00 percent, a 45 year low. This was the 13th rate cut in the federal funds since the easing of cycle started in January 2001. But dollar continued to edge lower against most of major currencies throughout the world. Market expects the US dollar to weaken further against most of the currencies.

Euro

The European single currency appreciated in value during the year 2003. It rose by 20.6 percent throughout the year to its all time high of 1.2462. Dealers attributed the rise to the depreciation of the US Dollar, rather than the inherent strength of the euro itself.

European Central Bank (ECB) lowered its interest rate on H1 to 2.00 percent from 2.50 percent. Further rate cut seemed likely ECB kept the rate unchanged till the year-end and maintained its advantage of higher yield advantage because of the lower rate of US dollar. Mr. Jean Claude Trichet, was appointed president of the ECB in October, replacing Mr. Vim Deusberg. Market expects Euro to test $1.30 level by H1 2004.

Japanese yen

The Japanese currency noticed an upward surge in 2003. It rose by 14.16 percent throughout the year. But its rise was limited as Bank of Japan continued to intervene throughout the year.

Starting the year 2003 at 120 levels against the US dollar, yen rose as high as 106.75 by the end of the year. Bank of Japan intervened several times at various levels to curb the rise of the Japanese currency as yen's strength would hinder the export led recovery of its economy. Bank of Japan spent more than 10 trillion yen in FX market to curb the strength of its currency. Interest rate remained unchanged throughout the year at almost 0 percent. The Japanese currency is likely to remain range-bound because of the intervention fear by Bank of Japan.

Pound sterling

Pound sterling also experienced upward movement throughout the year. It rose by almost 14.88 percent against the US dollar in 2003.

Pound rose as high as 1.7754 against the US dollar, a new 11 year high in 2003. In H2, GBP started to weaken following the unexpected cut in interest rates, reinforced by weak data releases. Bank of England slashed its interest rate by 50 bps to 3.25 percent. It gained momentum since September and rose to its 11 year high and is expected to get stronger in 2004.

--Standard Chartered Bank