US dollar clobbered across the globe

Euro

The euro held the upper hand at the beginning of the week after it staged a massive rebound at the end of the previous week, helped by disappointing US jobs, which baffled investors and left them with doubts on the strength of the US economic recovery.

Intervention by Japanese authorities to stem it's own currency provided the dollar with limited support as a dearth of economic data left investors to lick their wounds and adjust their strategies.

The euro offered muted reaction to comments by incoming ECB President Jean-Claude Trichet, who stated that the global economy was improving
although some risks remained and added that he expected European growth to disappoint in 2003 but saying that a pick up was in the pipeline.

The single currency retreated in fairly sluggish trading, as bullishness in US equity markets helped the greenback gain some lost ground in the absence of any major market-moving economic news.

As investors struggled due to lack of economic data, a maelstrom of fresh concerns over the rising US budget and current account deficits took its toll on the greenback. Furthermore, the dollar was also buffeted ahead of the second anniversary of the terror attacks of September 11, and President George W. Bush's request to Congress for an additional $87 billion to fund operations in Iraq and Afghanistan.

Questions on how an economy could sustain growth in the absence of growth in the labour market also added downward pressure on the dollar. Meanwhile, as currency markets remained spooky by the weak US unemployment numbers, the dollar continued to be clobbered across the globe with the only support coming from Japanese intervention.

Comments by ECB President Wim Duisenberg who said that euro zone interest rates are appropriate at 2.0 percent - indicating that no cuts were expected, made the euro slightly more attractive against the US dollar.

As markets continued to take a bearish view of the dollar the currency found the going tough as investors started mulling on the impact of a $ 500 billion budget deficit on the world's largest economy.

A flush of data at the weekend indicating further weakness in the US economy proved to be the final nail in the coffin, as the dollar was whipsawed versus its European rivals. The downward move was initiated by the release of weekly jobless claims data, which rose to a higher-than-expected 422,000 in the week ended September 6.

In other data, the US trade deficit widened modestly to $ 40.3 billion as Americans bought up the second highest level of imported goods on record, indicating that the weaker dollar failed to have much of an impact on exports.

Pressure also mounted with the release of US retail sales data, which recorded a rise of 0.6 pct, well below expectations of a 1.4 pct gain, whilst producer prices rose 0.4 pct, both failing to impress, although some analysts said the reports showed underlying trends remained strong.

The euro which rose above $ 1.1300 levels in the aftermath of weak US economic data, got a further boost after the University of Michigan said that it's consumer sentiment index dropped to 88.2 in September's preliminary reading, from 89.3 in August and was below the expected reading of 90.0.

A Swedish referendum on joining the single currency to be conducted on Sunday will be the main draw in Europe next week, with the Swedish Finance Minister saying that he was hopeful of membership and adding that there would be no new vote if euro membership were to be rejected.

Range for the week: $ 1.1000 - $ 1.1500.

Japanese Yen

Intervention seemed to be the word on every trader's and investors' mind as Japan continued it's official efforts to keep the yen from strengthening during the past week.

The Japanese currency came under pressure as trading got underway amid talk of intervention by Japanese authorities. The yen which fell nearly one percent at the start of the week rebounded sharply as the Nikkei stock index continued to attract investors due to its resilient performance during the recent past.

The yen was further supported by an overall improvement in Japan's economy and also the widely expected re-election of Prime Minister Junihiro Koizumi as the leader of the ruling LDP.

Meanwhile, as the Nikkei edged towards it's highest levels for the year; the yen remained pinned under the weight intervention fears as market players remained nervous and reluctant in pushing the yen higher.

Speculation that Japan will be urged to pull back from intervention at the Group of Seven finance minister's meeting in Dubai later this month added limited support as the currency remained well-bid due to a revival in Japanese shares.

Mid-week, further good news greeted yen bulls after an upward revision to Japan's April-June gross domestic product growth. The Bank of Japan followed closely as they intervened apparently in a bid to discourage yen bulls from taking the yen higher.

Whilst gross domestic product was revised up to 1.0 pct from an initial 0.6 pct, other data showed Japan's trade surplus grew 7.1 pct in July from a year earlier, with exports up 5.4 pct. The data reinforced market perception that the economy was recovering thanks to strong overseas demand.

The yen is likely to face further downward pressure in the week ahead mainly due to persistent intervention by the Bank of Japan although yen bulls may try to push the currency higher if US data disappoints.

Range for the week: 115.00 -120.00.

Sterling

Sterling opened its account in aggressive fashion as it approached a two-week high against the dollar after data showed that manufacturing output in July rose at its fastest pace since last November.

Manufacturing output rose 0.5 pct in July beating expectations and boosting the view that Britain's economy is on track for a broad-based recovery in the second half of the year. The robust data also coincided with news of a larger than expected rise in producer prices and reconfirmed the view that British interest rates have hit a floor.

Comments by Chancellor of the Exchequer Gordon Brown, who stated that the United Kingdom has turned the corner and data showing a shrinking trade gap also helped the pound as it continued to gain against other major currencies.

As the week progressed, Sterling edged up to three-week highs against the dollar failing to find momentum of its own as market focus centred on the dollar's problems amidst doubts on the pace of recovery in the United States.

With no data of note in Britain Sterling took its cue from movements in euro/dollar as it ended the week on a strong note largely helped by broad-based weakness in the dollar due to disappointing US data.

Sterling is likely to be a big mover next week, as the release of inflation, retail sales and the Bank of England minutes is likely to give the currency independent direction.

Range for the week: $ 1.5850 - $ 1.6350.