A volatile week for currencies

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. 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