US recovery boosts dollar, hits euro

Euro

The euro weakened across the board at the start of the week on growing concern that the European economy is lagging behind the U.S. and Japan, with both showing clearer signs of recovery.

Gains on the U.S. stocks, which underpinned by enthusiasm of U.S. economic recovery, helped the dollar to move higher against the euro. The Dow Jones Industrial Average grew by 1 pct while the Nasadaq Composite index rose more than 2 pct.

As the week advanced, good data from United States continued to paint a brighter economic picture. Richmond Federal Reserve Bank President Alfred Broaddus said that he is a little more optimistic on the U.S. economy, with data looking stronger.

He added that the main headwind for the economy is the labor market that has a very good chance of improvement. He also mentioned the Fed could maintain an accommodative monetary policy until the output gap narrows.

The Commerce Department reported that the number of U.S. housing starts rose in July to 1.872 million annual rate, its fastest since April 1986. The Federal Reserve Bank of Philadelphia also reported that its index of factory business jumped to 22.1 in August from 8.3 in July.

However, the University of Michigan's gauge of consumer sentiment disappointed expectations by dipping to 90.2 in August from 90.9 in July. On the other hand, weak European economic data took the shine off from the single currency. Euro zone inflation eased to 1.9 pct in July from 2.0 pct in June and the region's industrial output fell unexpectedly by 0.1 pct in June from the previous month.

Additionally, France reported that its economy contracted unexpectedly in the second quarter, raising fears that the euro zone may slip into recession. France announced that its economy shrank 0.3 pct in the second quarter, following a contraction in Italy, Germany and Netherlands in the same quarter.

Meanwhile, the German ZEW expectations indicator that rose for the eight month in a row in August, failed to give the single currency any support.

News that Taiwan's central bank had no plans to diversify more of its $182 billion foreign exchange reserves into the euro, also weighed on the European currency. A senior Taiwanese central bank official said that the euro is still expensive and thus not worth diversifying the bank's reserves.

Main market's focus will be on the outlook of the U.S. economy, with U.S. durable goods figures and Conference Board consumer confidence survey, expected to be released next week. Meanwhile, in the euro zone, the economic outlook is less sunny but Germany's Ifo business climate index will be closely watched.

Range for the week: $1.0650 - $1.1150

Japanese Yen

At the beginning of the week the Japanese yen advanced broadly after the Nikkei stock market average jumped above 10,000 for the first time in a year, on raising optimism about Japan's economic outlook.

The Ministry of Finance released its weekly capital flows report, which indicated that foreign investors boosted their purchases of Japanese equities five-fold last week to 450 billion yen from 91 billion yen the previous week.

In addition, the yen extended its gains after the release of Japan's service sector that grew 1.2 pct in June versus the prior month and well above market's expectations. Japan's all-industries activity index also rose more than expected by 0.9 pct in June from the last month, supporting evidence that the economy is moving towards recovery after a decade of torpor.

However, repeated warnings of intervention by Japanese officials to weaken the currency, limited the yen's upward trend, which hurt the Japanese exports.

The Ministry of Finance's vice minister, Zembei Mizoguchi, stated that he did not see the conditions in place for the yen to strengthen further, adding that Finance Ministry would take action as needed. Japan spent a record nine trillion yen ($76 billion) on currency intervention this year.

In the week ahead, market will keep a close eye on the Japanese stock market and economic data such as unemployment figures, retails sales and industrial production.

Range for the week: 115.00 -120.00

Sterling

The sterling fell against the dollar at start of the week on optimism about the U.S. economic outlook and lack of British data that gave a little chance for independent movement by the pound.

As the week progressed, the pound rallied across the board on news that Bank of England acknowledged signs of recovery in the British economy. The BoE's committee, which voted to cut interest rates in July, decided unanimously to leave interest rates unchanged in August and reported that retail spending and the housing market has been surprisingly strong.

Moreover, the sterling got support from data indicating government finances were in better shape than expected. The British government's cash position swung into surplus in July, boosted by seasonal corporate tax inflows and record value-added tax receipts.

Ahead of the weekend, the pound trimmed its early gains after July retail sales dropped 0.4 pct on the month, less than market forecasts. Business investment in Britain also fell in the second quarter of 2003 to stand at 3.5 pct lower that a year earlier.

However, the final reading of Britain's second GDP, which rose 0.3 pct from the last quarter, had a little impact on the pound.

Range for the week: $ 1.5600 - $ 1.6100.