Wild gyrations ahead for US dollar (page 1 of 2)

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.