A volatile week for currencies (page 1 of 2)

Euro

The dollar started the week on a dismal note against the euro mainly due to a report showing manufacturing in the U.S. Midwest expanded by less than expected in June.

The National Association of Purchasing Management-Chicago business barometer, a measure of manufacturing in the region, rose to 52.5 in June from 52.2 in May, coming in below analysts' expectations of a 53.0 reading.

The European single currency also gained strength from the day's lows after the Bank for International Settlements said dollar faced more downside risks now than two decades ago, although higher U.S. productivity growth should help support the currency.

Moreover, European Central Bank member Ernst Welteke reiterated that interest rates in the region were currently appropriate to the Bank's goal of price stability. He remarked that the Feds quarter-point cut has not heightened pressure on the ECB to follow suit. However, he was less enthusiastic on the overall economy, saying that while economic data has stabilised somewhat, he did not foresee a strong rebound this year.

The U.S. dollar continued its downward trend as a key U.S. manufacturing data came in below market expectations. The Institute for Supply Management reported that U.S. manufacturing activity in June contracted, though at a slower pace than in May, disappointing economists and investors who were counting on an expansion in the hard-hit sector.

The ISM June manufacturing index was 49.8, up from 49.4 in May but below economists' forecast for 51. A reading below 50 signals contraction in the sector. The euro was able to cross the $1.1600 level after the release of the figure but retreated back due to a strong performance by the U.S. stock market.

Additionally, data from Europe also came out disappointing. The Reuters Eurozone Purchasing Managers' index for manufacturing slid further below the 50 line in June, sinking to 46.4 from 46.8 in May. However, this data did little to hurt the euro as it was in line with expectations.

Negative remarks from German DIW think tank further darkened Germany's prospects, saying its economy could shrink this year for the first time since 1993. While Ernest Welteke, president of the Bundesbank and a European Central Bank Governing Council member, said German growth targets of 0.75 percent this year and 2.0 percent for 2004 are optimistic, but possible.

The euro was not very much heartened by these comments and fell close to $1.1500 levels. The dollar ended the week on a roller-coaster ride as figures released painted a mixed picture of the U.S. economy. The greenback fell on news that U.S. jobless rate climbed to 6.4 percent, a fresh nine-year high, and 30,000 non-farm jobs were lost.

An even bigger surprise was a downward revision for May showing 70,000 jobs were slashed from payrolls, not 17,000 as initially reported. Economists had forecast a 6.2 percent unemployment rate for June.

However, the dollar staged a recovery after service sector numbers, which accounts for the bulk of the U.S. economy, unexpectedly surged higher in June, lifting the dollar on the prospect of more jobs being created in the near future.

The Institute for Supply Management's index of non-manufacturing activity jumped to 60.6 in June from 54.5 in May. It now stands at its highest level since September 2000. A reading above 50 indicates expansion.

Markets attention will be focused next week on the European Central Bank meeting on Thursday, where analysts expect the ECB to leave rates unchanged at two percent.