Bush backs a strong US dollar

Euro

The European single currency started the week hovering above $1.18 levels with activity limited to light range-trading ahead of holidays in New York and London.

With European officials apparently unconcerned by euro's rally, the four-year-old euro continued to move higher and broke $1.19 levels. European Central Bank Executive Board Member Otmar Issing said that the euro's advance brings it back to more normal levels, while ECB Governing Council member Ernst Welteke expressed comfort with the euro levels.

Austrian Central Bank Deputy Governor Gertrude Tumpel-Gugerell also mentioned that the current strength of the euro is "bearable" for the euro zone economy. Moreover, brighter signs from the German economy gave the single currency added momentum. The Germany's key business index Ifo beat most analyst expectations and peaked to 87.6 in May from 86.6 in April.

As the week progressed, the single currency started to reverse its gains against the dollar after a string of U.S. data that sparked optimism over the U.S. economic outlook. U.S. consumer confidence rose in May to a six-month high of 83.8 from 81 in April, while April new home sales increased to 1.7 pct, more than expected.

Moreover, the May Chicago Purchasing Management Index mounted to 52.2 from 47.6 in April and the University of Michigan's consumer sentiment index for May rose to 92.1 from 86.0 in April. Heading towards the weekend, European Central Bank policymakers made encouraging noises about euro zone inflation, fuelling expectations that the ECB might trim interest rates on its meeting next week.

Board member Eugenio Solans stated the ECB expected inflation to be below two percent this year while Bundesbank President Ernst Welteke said inflation should fall further from April's 2.1 percent. ECB chief economist Otmar Issing also reinforced the view that cuts may come, saying the risk of deflation could not be ruled out in Germany, but that recent talk of a general decrease in price is "less rational".

The cut to the euro zone's benchmark rates, currently 2.5 pct, would narrow the difference with U.S. benchmark rates of 1.25 pct and reduce the advantage euro-denominated deposits and investments hold over dollar-denominated assets.

In addition, the dollar received double boost by worries that some world leaders might express concerns over the U.S. unit's recent weakness during the weekend's summit of the Group of Eight world powers in Evian, France.

Comments from U.S. President George Bush, Japanese Prime Minister Junichiro Koizumi and German Chancellor Gerhard Schroeder appeared to show heightened concern about the dollar's fall. Schroeder said the rapid rise in the euro posed a risk to Germany and was already dampening growth in Europe's largest economy.

Moreover, Bush was quoted as saying that Washington was conducting policies favorable to a strong dollar. Next week, adding to ECB meeting, market will keep a close eye on Institute for Supply Management's May manufacturing report and non-farm payrolls data for the U.S.

Range for the week: $1.1600 - $1.2100

Japanese Yen

The yen was steady at 116.80 levels against the dollar at the beginning of the week, but started to trim its gains after wariness over Japanese intervention continued to help the dollar.

Japan's top financial diplomat Zembei Mizoguchi offered a fresh warning, reiterating Japan will act in the foreign exchange markets as needed. He also added that he saw no change in the U.S. stance of favouring a strong dollar.

Moreover, an earthquake, which hit northern Japan near the city of Sendai pushed the yen lower against the dollar and the euro. The earthquake caused house fires in the downtown area, snarling communications and rocking buildings as far away as Tokyo 302 kilometres.

The quake measured 7.0 on the open-ended Richter scale, about the same strength as the devastating quake in the Japanese city of Kobe eight years ago. However, there was no word of casualties and no major damage reported.

As the week advanced, USD/JPY rocketed to 119.00 levels amid repeated warnings of Japanese intervention, with speculations that Japanese authorities may have already stepped into the market and intervened when the dollar fell to around 116.20 yen.

Later in the week, Japanese officials confirmed that the government sold 3.9825 trillion yen ($33.7 billion) in May, a record single month figure, after refraining from intervening in April.

The move aimed to maintain a weak yen in order to protect its fragile export sector, one of only a few bright spot in an otherwise dismal economy and sent the yen to 119.63 levels against the dollar.

Range for the week: 116.00 -121.00

Sterling

The British pound hit 1.6471 levels against the weakening dollar at the start of the week tracking EUR/USD trend, with little UK economic data scheduled for release in the week.

Later in the week, sterling failed to extend its rally and fell below $1.6400 levels, after the release of the bright U.S. data, which indicated that the U.S. economy may be doing slightly better than markets had expected.

Bank of England's interest rate decision next week will be on top of the agenda. Minutes of the MPC's early May meeting showed the committee voted 5-4 to leave rates steady at 3.75 percent. U.K. housing and consumer data also bolstered the view that the BoE would keep interest rates on hold.

UK consumer confidence returned to pre-Iraq war levels, with Martin Hamblin GfK's barometer rising to -3 in May from -5 in April. Meanwhile, Nation-wide Building Society data showed house prices were up 21.3 pct in May from a year earlier, the weakest figure since July 2002 and down from the 22.2 pct in April.

In addition, the announcement on June 9 of the Treasury's assessment of whether five economic conditions have been met for British to join the euro will be a key focus next week.

Range for the week: $ 1.6000 - $ 1.6500.