Euro on the defensive as US dollar shows strong gains (page 1 of 2)

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.