Dollar slumps as traders get jittery

The Commerce Department reported that the U.S. economy grew 3.1 percent in the second quarter, roughly in line with most economists' forecasts of 3 percent. The growth data showed the economy advanced in the second quarter, but failed to provide new incentive for traders to buy dollars and was a confirmation of existing trends.

Meanwhile, initial jobless claim rose to 394,000, against the previous week's 391,000 figure. This was the fourth consecutive week in which the moving average remained below the key 400,000 mark.

It was viewed as a sign of an improving job market, but one, which is not clearly off the ropes yet. At the end of the week dollar slumped against the euro as traders got jittery ahead of the long U.S. Labour Day holiday weekend.

Meanwhile, the US dollar was also hurt after another bombing in Iraq. A car bomb exploded at a mosque in the holy city of Najaf, killing more than 75 people. The attack heightened concerns that the U.S. forces are failing to establish stability in Iraq, and re-ignited the geopolitical fears that weighed on the greenback earlier this year.

Greenback did not find much support from mixed U.S. data, or a speech by Federal Reserve Chairman Alan Greenspan. The Chicago Purchasing Management Index came in stronger than expected rising to 58.9 from a reading of 55.9 in July, well above expectations of a 55.5 reading.

The University of Michigan's survey of consumer sentiment came in at 89.3 in August against a forecast of 90.5 reading.

Financial markets are looking for some clues on how long would it take before the economy of twelve nations sharing the euro, follows in the footsteps of the United States on the road to economic recovery.

Next week the important figures out of euro zone is German August unemployment reports, July manufacturing orders and Euro zone August manufacturing PMI, July PPI and unemployment.

The European Central Bank is widely expected to leave interest rates unchanged at a record low of 2.0 percent on Thursday.

Range for the week: $1.0700 - $1.1200

Japanese yen

Japanese yen started the week on a firm tone hovering near one-month highs against the dollar on expectations that Japan's bullish stock market would continue attracting global funds.

Meanwhile, Japan's July trade data showed the country's trade surplus rising by 7.3 percent from the same month last year. Exports rose by 5.6 percent, while imports increased by 5.3 percent, both stronger than consensus forecasts by economists.

The signs of recovery in Japan have sent the yen soaring against the dollar, and Japanese asset markets have been buoyed by robust figures.

However, the Japanese yen's recent advances have been stalled by caution about possible intervention by Japanese authorities, who spent about nine trillion yen in the first seven months of the year to prevent a higher yen from choking off Japan's recent economic recovery.

Japanese authorities are expected to intervene at any time to push the yen down, despite recent signs of improvement in Japanese economic fundamentals. Japan's top financial diplomat, Zembei Mizoguchi, said that even though there were signs of improvement in the Japanese economy, its was not especially strong in comparison with other leading countries.

He added 'it is not appropriate to only look at the Japanese economy, we need to see it from the standpoint of world economies'.

As the week was coming to an end there was an avalanche of mixed data from Japan. The Nikkei share price average pushed higher in the wake of surprisingly strong Japanese industrial output data.

Although output attracted the most attention, in fact consumption, which accounts for about 55 percent of Japan's gross domestic product, still looked weak, with unseasonably cold weather over the last two months not helping.

Japanese retail sales fell for the 28th straight month in July, dropping a preliminary 3.0 percent from a year earlier. Ahead of the weekend yen pushed higher against the dollar mainly due to surprising news that the Bank of Japan had not intervened to weaken the Japanese currency during the month of August.

Optimism over Japan's economic recovery also supported the yen's rise. Data showed Japan's industrial sector grew by 0.5 percent in July, well above what analysts had expected.

Range for the week: 115.00 - 120.00

Sterling

Sterling started the week on a soft note and tended to followed the euro lower against the dollar as London markets were closed for a holiday.

The Hutton inquiry into the death of Iraqi weapons expert David Kelly was seen as an added negative for the sterling, with Defence Secretary Geoff Hoon due to be questioned on Wednesday and Prime Minister Tony Blair on Thursday.

Sterling came under additional pressure after the Research Company Martin Hamblin Gfk said its consumer confidence barometer fell to -3 in August from -1 in July. Analyst had expected to see a rise to zero.

As the week advanced sterling managed to gain back some of its losses against the dollar after Prime Minister Tony Blair's testimony in an inquiry into the death of a weapons expert went off better than some expected, while predictions of higher UK interest rates also got a boost.

The Bank of England Monetary Policy Committee member Paul Tucker warned debt-laden British consumers interest rates would not stay low forever, which support sterling's yield advantage over other currencies.

Interest rate expectations have been a key driver of sterling sentiment throughout the year thus far as investors weighed the relative benefits of Britain's higher interest rate returns over the euro zone.

Next week the UK's Monetary Policy Committee is also widely expected to keep interest rates stable on Thursday at a 48-year low of 3.5 percent.

Range for the week: $1.5500 - 1.6000