Euro on the defensive as US dollar shows strong gains

Euro

The euro was on the defensive at the start of the week on media reports that Germany's Lufthansa had made a firm take over bid for Swiss International Airlines.

The greenback was not able to make much headway in anticipation of Federal Reserve Chairman Alan Greenspan's semi-annual testimony before Congress. Analysts expected Greenspan to sound optimistic on future economic growth prospects.

However, comments by International Monetary Fund chief economist Kenneth Rogoff that the dollar's fall was needed to correct the U.S. current account deficit had little impact on the dollar.

The dollar took notice of fairly robust U.S. retail sales figures. Commerce department said retail sales grew by 0.5 percent in June after being flat in May. In Europe, Germany's ZEW institute said its economic expectations indicator jumped a larger than expected 20.6 points in July.

The data however, did not provide much support for the euro. The dollar continued to advance against the euro after Federal Reserve Chairman Alan Greenspan highlighted signs of improvement in the U.S. economy even as he suggested the possibility of further rate cuts on persistent deflation concerns.

In testimony to Congress, Fed Chairman indicated that benchmark interest rates, currently at their lowest level in 45 years, could remain low until economic activity picked up in earnest. Greenspan said the economy has shown signs of improvement, with industrial production appearing to have stabilised in recent weeks and consumer spending holding up well.

The following day dollar slipped from its two months peaks against the euro after fall on Wall Street due to profit warnings from Lucent Technologies and a decline in second quarter earnings at Ford Motor.

Earlier, June U.S. Consumer Price Index came within expectations and June industrial production numbers were also within consensus. However, the data failed to provide much support for the dollar.

Furthermore, dollar came under additional pressure after Fed Chairman Alan Greenspan failed to shed new light on the direction of the U.S. economy. In his second leg of congressional testimony Greenspan failed to offer new incentives as he largely reiterated what he said the previous day.

Moreover, euro was helped after Bundesbank President Ernest Welteke was quoted as saying he would not bet on any further rate cuts from the European Central Bank at the moment because they would not have any positive economic effect.

The dollar see-sawed once again against the euro. Dollar regained strength after reports showed that the U.S. economy was quickening its pace of growth. An unexpectedly strong reading in U.S. housing starts, coupled with a sharp fall in initial jobless claims in the week to July 12, lent credence to views that the second half could bring stronger U.S. growth.

The Philadelphia Fed index, a gauge of the manufacturing sector that is closely followed by the market, rose to 8.3 in July from 4.0 in the prior month. Meanwhile, euro zone industrial production for May undershot expectations, showing an annual fall when a modest growth was expected.

At the end of the week greenback slashed its latest gains after University of Michigan's preliminary consumer sentiment index showed strength in July but disappointed investors who had anticipated a stronger number. The figure rose to 90.3, from June's reading of 89.7 and above a consensus forecast of 90.0.

Next week durable goods, new and existing homes sales and weekly jobless claims could catch the attention of investors searching for signs whether the U.S economy is on the mend.

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.