Watch for the Federal Reserve's big decision this week (page 1 of 2)

Euro

The dollar was on the defensive at the onset of the week as speculation the United States would ease interest rates heated up following weaker-than-expected consumer sentiment data.

Focus is shifting back to U.S. fundamentals, with the market keenly speculating on the amount of a possible rate reduction at the Federal Reserve's Open Market Committee (FOMC) meeting due to begin on June 24. Results of the two-day meeting are expected on June 25.

The University of Michigan reported its gauge of consumer sentiment slipped to 87.2 in June from the previous month's 92.1, contrary to economists' predictions that the figure would rise. The euro regained strength, with a record high above $1.1935, but was driven back by profit-taking.

Meanwhile, the European Central Bank board Ernst Welteke said the recent dollar depreciation might help the United States control its current account deficit.

However, the following day, the dollar regained composure boosted by a strong regional U.S. manufacturing report, which hit shortly after the sour consumer sentiment data.

The New York Federal Reserve's Empire State manufacturing survey, which is often overlooked by the market, far exceeded expectations, rising to a record high of 26.8 in June from 10.8 in May. Respondents voiced optimism on the sector's outlook, helping send major stock benchmarks sharply higher and underpinning the dollar.

The dollar continued to advance against the euro after data on consumer prices dampened speculation that the Fed will cut interest rates aggressively, leaving traders anticipating a shallower trim. In recent months analysts have grappled with concerns that the United States would suffer a sustained fall in prices that could force the Fed to lower borrowing costs by as much as half a percentage point to stimulate a sagging economy.

These fears were allayed, when the government reported that consumer prices were unchanged in May after falling 0.3 percent in the prior month. Excluding food and energy costs, "core" prices rose 0.3 percent in May.

The dollar see-sawed once again extending losses this time after a closely watched measure of the US manufacturing sector deflated market hopes for an imminent economic rebound. The Philadelphia Federal Reserve's index of manufacturing activity in the mid-Atlantic region showed growth for June, with the headline figure rising to 4.0 from -4.8.

But the figure fell far short of a more encouraging number factored in by many market participants. However, the dollar soared once again on the last trading day of the week hitting its highest level in a month against the euro on a shifting interest rate outlook and growing expectations of a US economic rebound.

Analysts expect that any reduction in interest rates will be supportive of growth in the world's largest economy, eventually helping the dollar even as the yield differential between assets of the United States and their higher-returning European counterparts widens.

A Reuter's survey of dealers who trade directly with the Fed showed a deep division over how aggressive the Fed will be. The poll, found the camp expecting a 50 basis point cut edging out those who see a smaller 25 basis points move by 12 to 9. The dollar capitalised on economic benefits of a likely rate cut, pressing to a new session high of $1.1552 to the euro.

Next week sees a slew of US data, which includes consumer confidence numbers, durable goods, home sales data, first quarter GDP figures, and personal income and spending data.