A volatile week for currencies (page 2 of 2)

Furthermore, Tuesday's German employment and industrial production figures may give some indication of how much Europe's biggest economy needs a boost from the ECB.

Range for the week: $1.1300 - $1.1800


Yen

The week started with the Japanese currency weakening to a two month low of 120.04 against the greenback, mainly due to speculation that the U.S. easing cycle may be over and that growth is likely to pick up.

However, markets were cautious not to drag the yen lower, with a spate of economic data due out in the U.S. The following day the Japanese currency staged a remarkable comeback after the release of stronger-than-expected "tankan" corporate survey.

The Bank of Japan data showed the key diffusion index of sentiment at large manufacturers improved to minus 5 in April-June from minus 10 in the previous quarter, its best level in two years. The tankan survey's key diffusion index, which subtracts the number of firms foreseeing worsening conditions versus those predicting improving conditions, was expected to remain flat at -10.

This helped the Nikkei rise 2.15% despite overnight losses on Wall Street. The Bank of Japan survey came on the heels of a Reuters' survey that showed Japanese manufacturing activity expanded to a 10-month high in June. The overall index in the Reuters/Nomura/JMMA purchasing Managers survey rose to 50.4, climbing above the midpoint for the first time in two months.

It was just the seventh time the index had come in above 50 since the survey began in October 2001. The yen was also heartened by news from Japan's Finance Minister, who revealed that it sold 628.9 billion yen in the currency market in June to weaken the Japanese currency. The June figure was significantly lower than the record four trillion yen spent in May.

The end of the week saw the yen underpinned by worries that an auction of 10-year Japanese government bonds would not draw sufficient bids. The benchmark 10-year yield shot up 11 basis points to 1.010 percent, more than double its record low of 0.430 percent hit last month.

Attention to the auction of the JGB's was unusually high because the government was conducting its first long-term bond offering since the JGB market started to fall.

Range for the week: 116.00 - 121.00


Sterling

The start of the week saw sterling trading a touch above recent two-week lows against the greenback.

It was supported by mixed UK consumer credit numbers, which showed a hefty rise in net borrowing but also revealed fresh signs of a cooling housing market. The Bank of England said consumer credit grew 1.1 percent on the month to stand 14.0 percent higher than a year earlier.

In April the rise had been 1.355 billion pounds and city economists had expected a figure of around 1.5 billion this time. However, mortgage numbers showed that lending rose by 6.9 billion pounds, the weakest since last September.

Midweek, saw the pound slip against the major currencies as newly appointed Bank of England Governor Mervyn King left markets pondering over the idea that a rate cut might be the result of his first policy meeting as central bank head meet next week. On his first day on the job, he was quoted in an interview as saying pound strength could hurt the economy, which markets saw as a hint of yield-damaging monetary easing.

Nevertheless, the pound gained some respite after the Chartered Institute of Purchasing and Supply/Reuters' Purchasing Managers' Index for British manufacturing beat forecasts and showed the slowest contraction this year, rising to its highest 2003 level so far at 49.2 from May's upwardly-revised 48.3.

Next week markets will focus on the Bank of England's July interest rate decision. Economists polled by Reuters expect the BoE to keep rates unchanged at 3.75 percent when it meets on July 9-10.

Economic indicators to be released next week include May manufacturing output and industrial production on Monday and trade figures on Wednesday. Economists polled expect industrial production to fall further by 2.7 percent on the year compared with a decline of 1.8 percent in the previous month.

Range for the week: $1.6350 - 1.6850