No more support for the US dollar

Summer holidays in Europe and a sudden power outage in the United States and Canada took some shine off the markets as major currencies remained confined to well established ranges. European data due next week will come under the microscope of market players, after strong numbers from the US this week, fuelled expectations of the US being on the mend.

Euro

The euro commenced the week on a stable footing as markets looked ahead to the US Federal Reserve's monetary policy meeting scheduled for later in the week. Speculation that Japanese investors were expected to embark on a large-scale dollar selling spree kept a lid on the greenback, whilst precautionary selling ahead of the policy meeting also undermined the dollar.

The meeting ended with no major surprises, as the Fed left interest rates unchanged at its 45-year low of 1.0 pct. The accompanying statement was rather mixed, with the Fed warning about the risk of falling prices and saying that rates could stay low for 'a considerable period' of time; reiterating it's commitment to an accommodative monetary policy.

The statement also said that the outlook for growth remained neutral, helping the dollar to gain some ground as traders recommenced buying dollars heartened by the central bank's apparent view that the economy was growing.

As the week unfolded, traders started refocusing their attention to a barrage of economic data due to be released during the week. The first of the majors came in the shape of retail sales for July, which recorded a rise of 1.4 pct, and was much stronger than expected.

The dollar, which was thought to be headed higher due to the impressive number found the going tough, as bond yields soared, leading to fears that higher rates may undercut the budding economic recovery of the United States.

Although, the strong figure added to the recent spate of good data, investors rushed to sell US government debt, taking yields within spitting distance of one-year highs. Analysts said that the strong data could trigger a vicious cycle that could see interest rates higher before the economy has fully recovered, as US Treasuries are treated as a benchmark to consumer lending rates.

Next came the weekly jobless claims data, which continued to remain under the key 400,000 mark, while producer prices saw a small increase that was in line with expectations. In addition, data also showed that the US trade gap narrowed to $ 39.55 billion in July, and was better than the forecasted deficit of $ 41.8 billion. Data released in the euro zone showing that the 12-nation bloc's largest economy - Germany, suffered a technical recession in the second quarter added further support to the dollar and pushed the single currency lower.

With many European cities closed for the Assumption day holiday, and the US struggling with the biggest ever black out in its' brief history, economic data had little impact on the currencies. US consumer prices gained 0.2 pct in July, largely in line with expectations, whilst July industrial production showed a stronger-than-expected rise of 0.5 pct adding support to the dollar in an otherwise dull market, where many traders were pre-occupied with the mysterious power outage.

The Federal Reserve said that overall business conditions for New York State manufacturers stayed positive for the fourth straight month in August, adding further support to the dollar, whilst the University of Michigan postponed the release of its' consumer sentiment index until Aug 19.

Range for the week: $ 1.1000 - $ 1.1500.

Japanese Yen

With a series of key events and data lined up for the week, the yen started the week on a strong footing after being supported by investors dumping the European single currency.

With speculation of a massive dollar selling spree forming as a result of coupon payments and redemptions of US Treasuries the yen was able to maintain the pressure on the greenback and remain stable around 119 yen per dollar.

Comments by Zembei Mizhoguchi, who offered a fresh verbal warning saying that the ministry was always ready to take action to stem rapid fluctuations in the currency market, helped keep a check on the yen's progress. As the threat of intervention loomed large, the Japanese currency failed to draw support from stronger-than-expected growth figures as potential sellers of dollars worrying about the Bank of Japan's determination to hold the yen lower stayed away from the markets.

Data showed that the Japanese economy recorded 0.6 pct growth in the April-June quarter but traders were unconvinced that growth would pick up quickly, with the GDP deflator at 2.1 pct, showing that deflation remained a big problem in Japan.

With many investors out of Tokyo for the Obon holidays trading activity remained thin and the dollar continued to be sandwiched between repatriation interests and intervention concerns around the 118.50 level.

Analysts said that the dollar's upside potential would be limited to around 119.50 in the shorter term with many exporters having placed sell orders around 119.50 levels, amidst varying doubts about the health of the US economy.

A rally in the Nikkei at the week-end, which took the index past the pivotal 10,000 mark at one point also supported the yen, but the Nikkei's inability to sustain those gains coupled with positive economic data from the United States pulled the currency lower towards the 119 levels.

Range for the week: 117.00 -122.00.

Sterling

Sterling opened its account on a sleepy note falling to three-week lows below $ 1.6000 levels as thin summer trading conditions saw it taking its cue from movements in other major currency pairs.

British economic data released at the start of the week showing that producer prices rose at a faster pace than expected and trade data that showed a widening in the gap to 4.5 billion pounds in June had little impact on the pound. As the week advanced Sterling refused to budge from its range and offered muted reaction to a surprise upturn in UK inflation.

The Bank of England MPC - targeted RPIX indicator rose unexpectedly to an annual rate of 2.9 pct, from 2.8 pct in June, while the harmonised number rose to 1.3 pct, well below the government's target of 2 pct; set to be introduced in November.

Upbeat jobs data powered the British currency higher, as it rose to a one-week high against the euro and pulled back from a three-year low against the greenback.

The ILO jobless count fell to 1.458 million, the lowest since the second quarter of 2001, while the claimant count measure of joblessness, which counts those actually getting benefits, fell 8,800 in July, even though analysts had expected a rise. Comments by the Bank of England, which said that inflation would fall back over the next year also supported Sterling higher.

As the week drew to a close, Sterling remained confined to ranges as markets responded listlessly to a batch of US data. With traders paying attention to the power outage in the United States the pound ended the week on a relatively weak note.

Looking ahead, sterling is likely to be subjected to a gruelling ride, with British retail sales, the RICS housing survey and minutes of the Bank of England's latest policy meeting scheduled to be released during the week.

Range for the week: $ 1.5860 - $ 1.6360.