Euro set to rise higher against the US dollar

Euro

The euro held strong at the start of the week, as weaker than expected economic data released at the end of the previous week placed the greenback on a defensive footing.

The single currency was also supported by a steady inflow of funds into higher-yielding European assets, as disappointed investors shifted their funds across the Atlantic in to the euro zone. A dip in the German Ifo business sentiment index and a downward revision to Germany's economic growth target for 2003 took some shine off the euro as the dollar capitalised and staged a mild recovery.

A surge in Wall Street aided by upbeat corporate earnings and a move towards solving the North Korean nuclear stand off were also seen as factors supporting the dollar's rebound.

Meanwhile, the release of US consumer confidence, which came in at a surprisingly high 81.0 in April from a depressed 61.4 in March, and recorded the largest rise since the Gulf war of 1991, caught the markets off guard as the forecast had only been for a reading of 68.7.

As expected, the dollar showed signs of a rally in the immediate aftermath, but disaster struck as it fell back heavily against the euro and recorded a fresh four-year low of $ 1.1135.

Whilst many analysts had difficulty explaining the dollar's fall following an impressive confidence reading investors unhappy with the meagre returns offered by the United States continued to rally round the euro seeking higher yields for their money.

Midweek, the thirst for the single currency continued undeterred as the murky US economy provided an excuse for investors to diversify their assets and chase the euro aggressively. Speculation that the US Federal Reserve may ease interest rates in the near future also piled on the pressure as the US unit succumbed to the pressure of the rampant euro.

Alan Greenspan, chairman of the US Fed, confirmed this view in his testimony before the House of Representatives stating that there was room for US interest rates to fall further. As the week progressed, the release of the Institute of Supply Management's manufacturing index added salt to the dollar's wounds as it dipped to 45.4 in April against expectations of a rise to 47.3.

Bearish signs in the US labour market also undermined the dollar, with weekly jobless claims recording a dip of 448,000, much higher than the number anticipated. As the data cast a dark cloud over the prospects of the US economy, the single currency skyrocketed to a fresh four-year high of $ 1.1287 as investors continued to shy away from the US unit.

The week ended with a bleak US jobs report, which showed unemployment edging up to 6.0 pct in April, from 5.8 pct in March. Although the overall number of job losses were less than expected, concerns over the manufacturing sector which shed jobs for the 33rd straight month, put a dark cloud over the US economy and its' currency.

The US Federal Reserve and European Central Bank meetings next week will be closely watched by markets across the globe, but many analysts expect both offices to return a no-change verdict at their respective meetings.

Range for the week: $ 1.1050 - $1.1450.

Japanese Yen

The Japanese yen started the week on a mixed note as it came under pressure from investors looking to dump the currency due to political tension in North Korea and the uncertainty over SARS.

The greenback's broad-based weakness against european currencies came to the yen's rescue as the Japanese unit managed to put on an encouraging display in an otherwise lacklustre market.

Whilst the euro remained the cream of the markets and blasted away to a fresh four-year high against the yen, warnings by Japanese finance officials kept a check on movements in dollar-yen levels. A sharp drop in the Nikkei stock index, which hit a 20-year low following a shock earnings report from Sony Corporation, also undermined the yen.

As the week progressed, weaker dollar sentiment continued to gather momentum around the world sending the dollar down against most major currencies. Wariness over possible Japanese intervention kept a lid on the yen, whilst strong yen-selling demand from Japanese investors wishing to buy higher yielding foreign assets also helped keep the yen under check.

Japan's top financial diplomat, Zembei Mizoguchi, warned that the concerned authorities stood ready for action if movements in the forex market were deemed too excessive. Mizoguchi's comments were taken seriously by market participants who showed muted reaction to a Reuters survey of Japanese manufacturing that showed the sector expanded for the first time in eight months.

Despite mounting worries about a global slowdown, the SARS outbreak and a fall in Tokyo share prices to 20-year lows, the overall index rose to 50.1 in April from 48.9 a month earlier.

Meanwhile, the yen fell to a fresh four-year low of 133.38 against the euro in the after-math of the US ISM manufacturing report, but moved higher against the dollar to test a one-month high of 118.15, as market players went on an aggressive dollar-selling spree.

An article published by Japan's Jiji press stating that the three-party ruling bloc will call for flexible yen-weakening market intervention as part of emergency economic proposals, helped the dollar bounce back after trading indecisively in the wake of lacklustre US economic data.

The yen is likely to be range bound in the week ahead as markets will be wary of intervention by Japanese authorities, who are likely to step in if the currency breaks above the 118.00 barrier.

Range for the week: 117.00 -121.00.

Sterling

The British Pound started the week in a fighting mood as it recovered from four-year lows against the euro, after a shock fall in German business sentiment took some gloss away from the single currency.

The Confederation of British Industry said that the United Kingdoms' own gauge of confidence among firms fell to -27 in April from -19 in March, but the news failed to have much of an impact as market players were pre-occupied with developments related to the single currency.

With markets largely dominated by trading patterns in euro/dollar, sterling recommenced its downward momentum against the euro, after breaking through key chart levels.

The pound, which had drawn support from healthy UK retail sales and consumer confidence data that suggested a turnaround in the economic fortunes of Britain, relinquished all those gains as the euro staged a sharp comeback despite good US data.

Meanwhile, surprisingly good retail sales data helped sterling, as it combined with bright consumer confidence to lead markets to cut back expectations of further monetary easing by the Bank of England, lessening pressure on the currency.

As the week progressed, Sterling resumed it's tumble against the euro, as it dipped close to 70 pence for the first time in 4 years, with many keen to push it towards the launch price of 70.80 pence per euro.

Meanwhile, comments from Chancellor of the Exchequer Gordon Brown, defending his economic growth forecasts during a testimony to the parliament's Treasury Select Committee, failed to help the currency and did nothing to change the market's view about the chancellor being overly optimistic about UK's economic prospects.

A series of dismal economic data from the US and a surprisingly optimistic manufacturing index in the UK, pushed Sterling higher to $ 1.6114 - it's highest since March 13, as the greenback was at the receiving end of a massive onslaught by the euro.

The week ended with renewed speculation of a rate cut at next week's Bank of England meeting taking Sterling beyond 70 pence per euro for the first time since January 1999.

The Bank of England's policy makers will meet next week, with a slim majority of analysts predicting a further quarter point cut from the current 3.75 pct - already at a 48-year low; a move which may put pressure on the currency as investors continue to look for higher yields.

Range for the week: $ 1.5880 - $ 1.6280.