US dollar tumbles against the euro

Euro

The dollar slipped at the onset of the week, hurt by falling stocks and some modestly weaker-than-expected U.S. economic data.

A report showed that a key U.S. economic forecasting gauge showed strength in June, suggesting the pace of growth would quicken in the second half of this year. The Conference board said its leading indicators index rose 0.1 pct last month, falling short of Wall Street's expectations of a 0.2 pct rise.

With investors hungry for strong confirmation of the economic recovery during a week light on economic data, traders used the leading indicators index as an opportunity to take profits on the dollar. Poorly performing benchmark stocks too offered an added incentive to drive the dollar lower.

However, the following day the greenback rallied against major rivals after the U.S. military said two sons of Saddam Hussein had been killed in Iraq during a shoot out in the northern city of Mosul.

Nevertheless, the dollar's gains from developments in Iraq were somewhat muted as traders began to return their attention to U.S. stock and bond markets. Luck changed hands and the dollar once again tumbled against the euro undermined by falling U.S. stocks and renewed concerns about the health of the economy underscored by remarks made by a senior Federal Reserve official.

Federal Reserve Governor Ben Bernanke said in his prepared speech that the Fed could lower interest rates even further to keep the U.S. economic recovery on track and ward off deflation. His remarks sparked speculation that global funds may flow back to higher yielding currencies.

On the last trading day the dollar weakened broadly against all major currencies as investors sceptical of the U.S. economic rebound looked doubtfully at strong data on housing and durable goods. The Commerce department reported that new orders for costly manufactured goods surged 2.1 pct in June, the fastest rate in 5 months, well above Wall Street's expectations of a 1.0 pct rise.

Additionally, sales of existing homes dipped a modest 0.3 pct in June while sales of new homes hit a record pace. Evidence that the U.S. economy is said to grow strongly has eluded investors, who in recent weeks have begun selling stocks and the dollar anew after a period of buying both in anticipation of an economic revival.

As a result market participants say the combined data, though constructive, still fell short of what investors needed to see to lend credence to the recovery story and continue buying both America's assets and its currency. The euro hit a session high of $1.1550 against the dollar after the data and ended the trading week just above 1.1500 levels.

The euro's strength however, does not come without its drawbacks. The European commission said that the euro's second quarter rally reduced eurozone producers' competitiveness by 3.5 pct. Several European corporations said that the euro's high exchange rate had damaged their profits.

In the coming week, economic data will move centre stage with a slew of indicators on world labour markets and consumer and manufacturing trends available to satisfy market desire for clues on global recovery.

Germany's closely watched business climate index from the Ifo institute will launch the data marathon on Monday, likely to show an increase for the third month in a row and raising hopes for improvement in the eurozone's largest, most troubled economy. United States' indicators, including two consumer confidence surveys, non-farm payrolls and the Chicago Purchasing Management index, could all give a boost to economic recovery hopes, economists' polls have shown.

Range for the week: $ 1.1300 - $1.1800.


Japanese Yen

The yen hit multi-week lows testing 119.30 versus the dollar as weakness in Japanese stocks raised speculation that recent fund inflows to such shares might be slowing.

Japanese players sold the yen after U.S. Treasury Secretary John Snow said at the end of last week that he would not criticise Japan for intervening to weaken the yen.

However, the following day the dollar struggled to hold gains versus the yen as a rise in Japanese asset prices and negative comments on foreign exchange intervention eroded advances. The greenback eased against the yen on critical remarks from G-7 officials about Japan's massive currency intervention.

U.S. Treasury Secretary John Snow said that intervention in the foreign exchange markets should be kept to a minimum, " so a general policy of non-intervention makes sense". The market interpreted the comment as a retreat from his recent positive remarks about Japanese intervention.

Bank of Canada Governor David Dodge said that intervention was not necessarily the best use of Japan's resources when asked about the over 7 trillion yen Japan has spent so far this year to stem the yen's rise. Japan's Vice Finance Minister Zembei Mizoguchi, weighing in said Japan's foreign exchange interventions were aimed at stabilising the market, not at weakening the yen.

On the economic front, Japan's consumer price index fell for the 45th straight month in June, but with focus on the U.S. economic releases, the data barely registered. Next week, the dollar is expected to trade on a volatile note with an array of important U.S. economic releases likely to determine its trend.

Range for the week: 116.00 -121.00.


Sterling

Sterling remained under pressure over political uncertainty caused by the apparent suicide of a British former UN weapons inspector at the centre of a row over London's justification for the Iraq war.

Confirmation by British police that they had found the body of a scientist David Kelly helped push the pound to three month lows around $1.5780 levels. Adding on to the pound's woes, was the release of the CBI survey of trends in UK manufacturing which showed the total orders balance falling to the lowest level since January 1999 at negative 37 in July from negative 27 previously.

In addition, the minutes of this month's Bank of England meeting said sterling's rise since May could lower growth and inflation in the coming months. Towards the later part of the week, sterling bounced higher versus the dollar after buoyant British retail sales data eased talk of a further UK rate cut.

The pound jumped to one-week highs of $ 1.6200 levels after UK retail sales showed a rise of 1.9 pct in June from May, nearly five times stronger than the market had anticipated. But better than expected US weekly jobless claims bolstered the greenback across the board, leaving sterling trimming its gains.

UK data out next week include June consumer credit figures on Tuesday, while surveys on retail and consumer sentiment are due on Wednesday and manufacturing on Friday.

Range for the week: $ 1.5900 - $ 1.6400.