Treasury - Daily Forex for day 29.04.2005

The dollar firmed slightly against the euro yesterday as the stronger U.S. inflation reading overshadowed news of the weaker-than-expected GDP growth in the first quarter. The implicit GDP deflator grew by 3.2% in Q1, outpacing market forecast of a 2.2% rise. This boosted expectations that the Federal Reserve might start raising interest rates more aggresively. The GDP growth came in at 3.1% yoy, below forecasts of 3.6% and the slowest growth rate in two years. In the last quarter of 2004, the U.S. economy grew by 3.8%. Today, the market will be watching the March core PCE price index, a key gauge of inflation favoured by the Fed.

The Czech currency fell as low as 30.55 to the euro on Thursday in the wake of surprising quarter percentage point cut in CNB's main interest rates. The third 25 bp rate reduction this year brought the two-week repo rate to record 1.75%, below the benchmark rate in the euro zone, on the back of benign inflation. At the same time, the CNB lowered its quarterly inflation prediction and raised its outlook on GDP growth this year and next, similarly to Wednesday's new Finance Ministry's prognosis. The bank now sees annual CPI growth at 1.3-2.7% in March 2006 and at 1.4-2.8% in September 2006.