Wild gyrations ahead for US dollar

Euro

This week market focus shifted from the war in Iraq to the underlying fundamentals of the U.S. economy. Euro/dollar began the week holding footing near the 1.0750 level as markets fretted about the U.S. economic outlook and fresh developments in the Middle East.

Growing U.S. criticism of Syria led to apprehension of further instability in the Middle East and another possible blow for the American economy. U.S. officials threatened sanctions against Damascus, saying that Syria was harbouring Iraqi leaders and developing chemical weapons. Washington's tough talk rattled investors, who remain sceptical that the U.S. economy will show signs of recovery after the Iraq war.

Market focus also shifted to earnings reports with about 1,300 companies expected to announce their results during the week. The blue-chip Dow Jones Industrial Average shot up 1.8 pct while the Nasdaq Composite gained 1.92 pct helped by solid earnings results from banks on the first trading day. However, the dollar failed to capitalise on these gains.

The single currency inched higher versus the greenback on the following day with more uncertainty clouding the U.S. economic panorama. Data showed that U.S. industrial production fell 0.5 percent in March against expectations of a 0.2 percent decline. Capacity utilisation slipped to 74.8 percent in March from 75.3 in February.

Euro tested a high of $1.0821 in the aftermath of this data. Additionally, the Empire State Manufacturing index, which measures factory activity in New York state, fell to -20.4 in April, its lowest since October 2001, from a revised -2.8 in March. A reading below zero indicates that more companies reported deteriorating rather than improving conditions.

Midweek, dollar sentiment was further bruised by tumbling equity markets and a growing sense of worry about U.S. economic prospects. Blue-chip stock prices on the Dow Jones Industrial Average and S&P 500 indices fell sharply following a disappointing earnings report from soft-drink maker Coca-Cola. The Nasdaq Composite however managed to eke out meagre gains helped by solid earnings of tech giants Microsoft Corp and Intel Corp.

Euro/dollar tested a high of $1.0976 in early Asian trade on Thursday morning on the continued sell-off in the dollar. Markets attributed this to traders' positioning ahead of the release of Philadelphia Fed Manufacturing Survey figures. Following the dismal Empire State figure, many anticipated a larger than expected decline in the Philly Fed survey.

Nevertheless, the U.S. unit reversed some of its losses on profit taking and another Wall Street rally. Stocks rallied despite the Philadelphia Fed's manufacturing index slipping to -8.8 in April from -8.0 in March, as the figures were much less than the double-digit negative numbers predicted by economists. This prompted currency traders to buy back some dollars. Euro retreated towards the $1.0880 level and thereafter hovered around these levels as trading thinned-out due to Easter and Passover holidays.

In the coming week, investors will rummage through a raft of data from both sides of the Atlantic to assess the respective economic scenarios. U.S. figures include first-quarter growth, March durable goods and the Federal Reserve's 'Beige Book' report. Meanwhile, in Europe, the focus would be on German, French and Italian inflation data along with April confidence indicators from eurozone.

Range for the week: $1.0700 - $1.1200

Japanese Yen

With market attention shifting away from the Iraq war, the dollar was well supported against the yen trading around 120.70 levels at the start of the week.

The weekend meeting of Group of Seven (G-7) financial leaders that focused mainly on the reconstruction of war torn Iraq barely caused a ripple in the market. The yen was seen pressured on concerns about Japan's sluggish economy and a slide in Tokyo stocks to 20-year lows.

In addition, Japanese institutional and retail investors were eager to shift funds into foreign bonds in order to gain higher returns as domestic interest rates continued to fall to fresh record low levels.

The yen lost ground to the euro amid solid demand for euro-denominated bonds from Japanese investors unhappy with domestic interest rates at record lows. However, market players failed to drive up the dollar versus the yen as the greenback remained sandwiched between strong US corporate earnings and weak economic fundamentals.

Dollar/yen fell marginally below the 119.00 level on Thursday as the greenback came under renewed selling pressure on disappointing U.S. data releases. Nonetheless, worries about Bank of Japan intervention helped the dollar recover poise above the 119 axis.

Meanwhile, Bank of Japan Governor Fukui expressed concern over the economic recovery in his twice-yearly review to a parliamentary committee. He stated that there is a high probability that the economy will lack sufficient strength for a self-sustained recovery for a while.

Range for the week: 118.00 - 122.00

Sterling

The pound's fortunes remained largely dependent on the movement of the dollar as markets failed to show much reaction to U.K. data releases. Britain's March producer prices data released at the start of the week, showed the price of goods leaving factory gates rising at the fastest pace in more than two years, but failed to inspire much fresh trading in the sterling market.

With investor focus on the health of Corporate America in a week heavy with earnings results, the markets barely moved on data showing Britain's underlying inflation rate remained steady at a near-five year high. Britain's retail prices excluding the cost of home loans rose 0.4 percent on the month in March, keeping the annual rate of RPIX inflation at three percent and exceeding its 2.5 percent target for the fifth month in a row. Sterling continued to trade in its well-established ranges of $1.5700 - 1.5750.

Midweek, sterling chased the euro higher against the greenback, breaking above the $1.5800 level. The dollar lost ground across the board on tumbling equities and weak economic releases. Additionally a Reuters poll showed analysts did not expect Britain to join Europe's single currency in the next few years because political and economic concerns would deter the government from risking an early referendum on the issue.

Any news of a delayed euro entry most likely supports the pound. Profit-taking on the pound in thinned holiday-trading conditions, resulted in sterling retreating towards the $1.57 level after having touched a one-month high of $1.5844.

In the coming week, traders will focus on the publication of the minutes of Bank of England's April policy meeting and first quarter economic growth data.

Range for the week: $1.5500 - $1.6000