Euro on the defensive as US dollar shows strong gains (page 2 of 2)

Corporate earnings will remain at centre stage in the week ahead. In euro zone, German and Italian cities consumer prices data are expected to show little change on last month's figures.

Range for the week: $ 1.1000 - $1.1550

Japanese Yen

The Japanese yen started the week on a positive tone against major currencies, supported by view that foreign investors would keep pouring money into Japanese shares.

In addition general unwinding of euro/yen positions provided extra support for the yen. However, wariness over Japanese intervention continued to keep a cap on yen gains against the dollar. Japan's top financial diplomat, Zembei Mozoguchi, said he did not see the yen strengthening further over the medium term.

Meanwhile, Bank of Japan (BoJ) as expected, left monetary policy unchanged. The Bank also repeated its mantra of providing as much liquidity as possible regardless of target if the need arises. The yen gained strength as BoJ upgraded its assessment of the economy for the first time in a year.

The yen also benefited from a rally in Japanese benchmark shares and on increasing expectations that Japan's moribund economy may soon recover from prolonged stagnation. Greenspan's optimistic tone sparked fresh buying in the Japanese currency, sending it soaring to multi-month highs against the dollar.

As the week was coming to end yen lost all of its gains as a result of increased wariness over Japanese intervention. Rumours swirled amongst market participants that Japan may have intervened when the yen appreciated to 116.70 levels.

Japan's MoF stepped up its efforts in talking down the yen. Japan's Top financial diplomat, Zembei Mizoguchi, said there was still some volatility in foreign exchange markets, and repeated that Japanese authorities were ready to take all appropriate measures.

He said, "speculative trading causes sudden movements in foreign exchange markets that are not appropriate". At the end of the week yen managed to regain some of its losses against the dollar on the back of not so attractive U.S. consumer sentiment survey.

Range for the week: 116.00 -121.00.

Sterling

Sterling commenced the week under pressure on growing speculation that Britain would cut interest rates again soon.

Weaker-than-expected Producer Price Index in Britain put extra pressure on the sterling. Fall in UK inflation in June, raised speculation that Bank of England would trim rates further.

Data showed RPIX retail prices excluding the cost of home loans fell 0.1 percent in June, taking the annual rate down to 2.8 percent from 2.9 percent in May.

Midweek, sterling regained some of its losses after stronger than expected British employment data lifted it from its three-month low against the dollar. Unemployment in Britain unexpectedly fell to a two-year low in the three months to May while average earnings picked up more than expected by 3.4 percent over the period.

On the last trading day, sterling gains were hampered by the discovery of a dead body that matched the description of a missing scientist believed by the U.K government to be the source of a controversial media report accusing it of exaggerating intelligence to justify the Iraq war.

Next week important data due to release in Britain are Retail Sales on Thursday and GDP on Friday. On Wednesday the Bank of England's Monetary Policy Committee releases the minutes of its July meeting that surprised markets with a quarter point cut in British rates.

Range for the week: $ 1.5600 - $ 1.6200.