Markets stay in established ranges

Next week, market attention will fall on the Federal Reserve's policy setting meeting with analysts expecting key interest rates to remain unchanged; although the accompanying statement may have a huge impact if it signals a change of view on growth or deflation. Furthermore, the release of U.S. retail sales, trade, industrial production data and the University of Michigan consumer sentiment index will be also be scrutinised closely.

Euro

The dollar started the week on the back foot as weak U.S. economic data at the beginning of the month, dented hopes of a quick economic recovery in the United States.

Data at the beginning of the week did little to help the dollar due to declines in US equities, which saw the Nasdaq lose 2.37% and the Dow fall by 1.63%. The Institute for Supply Management's non-manufacturing index surged to 65.1 in July, posting its highest reading since the survey's inception in July 1997.

Driving the index higher was a jump in new orders, which surged to 66.9 from 57.5. The prices index dipped to 50.6 from 51.4. With not much data expected till the end of the week markets awaited the sale of U.S. treasury notes to determine the dollar's fate.

The U.S. Treasury Department offered three-year notes on Tuesday, five-year bonds on Wednesday and ten-year paper on Thursday. The current account deficit- the broadest measure of a nation's global trade- has swelled to record levels of around 5 percent of gross domestic product. Analysts' estimates show that the U.S. needs to attract at least $1.5 billion in foreign funds per day, to bridge the current account gap.

Dismal demand for the sale of $24 billion in three-year U.S. treasury notes also weighed against the dollar as it lost ground against most major currencies. However, the greenback recovered midway through the week following the auction of the five-year Treasury notes which fared much better than the auction of three-year notes.

The sale of about $18 billion in five-year bonds attracted bids for 2.48 times the amount on offer, the strongest since August 2000 auction that had a bid-to-cover of 3.06. The ratio was also higher than the 1.82 average of the previous four auctions. A breakdown of the data from the Treasury auction showed that indirect bidders, which are primarily made up of foreign central banks, purchased nearly a third of the total $18 billion in five-year notes.

The dollar remained firm against the Euro after the final leg of Treasuries auction came in line with expectations, increasing hopes for stability in the U.S. fixed-income market. The sale of $18 billion in 10-year notes came with a high yield of 4.37 percent and a bid-to-cover ratio of 2.00, an indication of strong demand, which was in line with the longer-term average of 2.01.

The bid-to-cover in the previous auction was 1.22. Furthermore, supporting the dollar was position squaring and data showing a rise in a gauge of U.S. economic activity. The Economic Cycle Research Institute, a private forecasting group, said its lending index rose to 128.0 in the week ended Aug.1 from a revised 127.1 the previous week.

Meanwhile, weak data released in the Euro zone kept the single currency under pressure. Italy's gross domestic product fell 0.1 percent in the second quarter according to preliminary data, showing that the Euro zone's third-largest economy suffered a technical recession in the first half of 2003.

Range for the week: $1.1000 - $1.1500

Yen

The Japanese currency traded well off its three-month low of $120.69 at the beginning of the week, as traders who had bought dollars on expectations of good jobs data, in the U.S., sold dollar's to square their positions.

Selling by Japanese exporters around the toppish 120 level also supported the yen. Meanwhile, the yen was also helped by an upgrade in the government's economic report, its first in five months.

In the government's August economic assessment, it cited that, the economy remains flat overall, yet the environment surrounding the economy, such as equity prices and the U.S. economy, is showing signs of change. Separately, Japan's FSA and economics Minister Heizo Takenaka expressed the government's hopes that an economic recovery in the U.S. and Asia would lead to a rise in Japan's exports.

As the week progressed, the dollar edged up against the Japanese currency ahead of the sale of U.S. treasuries and a fall in Japanese share prices. The Japanese currency was also curbed by speculative sales and selling by Japanese mutual fund operators, who were seen buying the euro, Canadian dollar and other currencies to set up new foreign currency funds.

However, greenback's rise was short lived as it fell below the 119 level, due to stop-loss orders below 119.50 yen, but speculation was that investors were trading on an intelligence newsletter suggesting diminished Chinese/Asian central bank interest in the U.S. Treasury market.

But markets were bracing for yen-weakening intervention by the Bank of Japan after the Ministry of Finance said that it had spent 4.6116 trillion yen on intervention in the April-June quarter to stem the yen's rise, which is seen as a threat to the country's export-led economy. The quarterly figure, equivalent to $38.36 billion at current rates, was the biggest since Japan began releasing figures in 1988.

Range for the week: 117.00 - 122.00

Sterling

Sterling started the week on a firm note mainly due to the encouraging tone of the latest economic reports.

The Chartered Institute of Purchasing Supply showed Britain's construction industry expanded at its fastest pace since November 2002, mainly due to healthy new business flows. The figures underlined the fact that the UK economy is recovering from the global downturn.

However, dollar's gains versus other major currencies after the successful auction of the five-year Treasury bond drifted the pound lower. Sterling was little changed against the dollar after the widely anticipated decision by Britain's central bank to leave rates steady at a 48-year low of 3.75 percent.

The end of the week saw sterling fall against the greenback, largely due to the U.S. dollar's rise against other major currencies and lack of economic data in Britain. Next week the main focus will be on the Bank of England's quarterly inflation report.

Despite signs of economic recovery, some analysts expect the report to reveal a downward revision to the central bank's May forecast of 2.25 percent GDP growth in 2003. Besides the inflation report, markets will watch closely price data, both at the wholesale and retail levels.

The producer price index will be released on Monday and is forecast to rise 0.1 percent on the month and 1.2 percent on the year, while the retail price index due on Tuesday is expected to be below expectations and may pressure sterling lower.

Range for the week: $1.5850 - 1.6350