Major rally for the US dollar (page 1 of 3)

The dollar responded with a series of three-month highs against the yen and two-week highs against the euro. Even a sharp fall in consumer confidence, as measured by the Conference Board's closely watched survey, failed to dent the market optimism seen early in the week.

Monetary policy meetings of the Bank of Japan and Bank of England next week are likely to result in unchanged rates, with recent data out of both Japan and Britain pointing towards improved economic conditions.

Euro

The euro kicked off with market trading cautiously in anticipation of good economic numbers from US in the later half of the trading week. Also aiding the US dollar was unwinding of long euro position ahead of a key German Ifo business sentiment survey.

But euro failed to capitalise on upbeat economic data that showed Germany's Ifo business climate index rose for a third straight month in July to 89.2, its highest level in a year, from 88.8 in June. But July's reading was below expectations.

The Fed's Beige Book suggested the economy is improving with most districts noting "somewhat stronger growth" in June and the first half of July and a more positive outlook for the period ahead. The report compiled by the Richmond Fed on data prior to July 21 said that activity in the manufacturing, services and energy sectors was stronger.

However, consumer spending emained "lacklustre." Housing starts and sales were strong in June and early July while commercial real estate remained sluggish and demand for commercial loans was weak. Residential mortgage loans demand was still spurred by low mortgage interest rates, the report said. Price and wage inflation remained "broadly in check."

Midweek, greenback's bullish momentum was briefly interrupted by an unexpected tumble in consumer confidence. The US Conference Board's consumer confidence index showed a drop to 76.6 in July from 83.5 the previous month. Economist had expected a reading of 85.0.

Prior to the confidence report, US Treasury Secretary John Snow reiterated his support for a strong dollar in an interview with a US television network.

After the release of the consumer confidence number upbeat comments by Dallas Federal Reserve President Robert McTeer gave the US dollar additional boost. He said the reasons to believe in an economic pick up are numerous and that a fall in consumer confidence was no cause for concern. McTeer had been dovish on the dollar until recently.

The dollar shot higher against major currencies, lifted by market hopes for strong U.S. economic data later in the week. The U.S. economy came back to life in the second quarter, according to preliminary figures released by the government, in part because military spending rose at the highest three-month rate since the Korean War.

In its first estimate of second-quarter gross domestic product, the Commerce Department said the economy grew at a 2.4 percent annual rate in the April-June period. That rise was well above the 1.5- percent rate of increase most Wall Street economists had been forecasting.

US Midwest manufacturing activity improved more than expected in July. The NAPM - Chicago index rose to 55.9, its highest level since January, from 52.5 in June. Economists had expected a reading of 54.0. Any reading above 50 indicates expansion.

In Euro land, the Bundesbank said it had not sold any of its US agency debt holdings recently after much speculation in the market that euro zone central banks had been selling US mortgage financing agency paper on the European Central Bank's advice.