Dollar ends a seven week losing streak

Euro

The dollar vaulted against its European counterpart at the onset of the week after European Central Bank President Wim Duisenberg said a Group of Seven call for exchange rate flexibility last month was not directed at the euro.

Duisenberg's attempt to clarify why the dollar has fallen so far and so fast against the euro seemed to make currency markets dispel dollar-bearish sentiment. The greenback continued to enjoy its upward momentum as U.S earnings optimism prompted a rebound in the dollar after seven straight weeks of decline.

After weeks of concentration on the U.S. current account deficit, and the need for a weaker dollar to correct it, investors switched focus to the brighter outlook for Corporate America as Bank of America and Merrill Lynch posted encouraging results.

Meanwhile, reports that indicated German economic sentiment fell unexpectedly in October had little impact on the euro. The ZEW index fell 0.6 points to 60.3, marking its first drop in 10 months. The dollar continued to motor ahead as the week progressed, buoyed by a sharp upward revision in U.S. retails sales numbers and a bullish New York state survey, which renewed hopes of robust growth in the United States.

U.S. retail sales fell 0.2 percent in September. Excluding the sluggish auto sector, sales rose 0.3 percent. Both figures were below consensus expectations. But August sales were revised to a 1.2 percent increase from a previously reported 0.6 percent gain, fuelling a dollar rally.

The dollar got a further lift after the Federal Reserve Bank of New York's Empire State Manufacturing Survey index of business conditions surged to a record high of 33.7 in October from 18.35 in September. But analysts warned that sentiment on the dollar remained bearish and viewed the greenback's rally as a minor pullback from a long term declining trend.

On the last trading session, a stronger-than-expected U.S. housing starts report for September helped push the dollar to a two-week high of $1.1550 against the euro. But gains were not sustained as markets were unconvinced that the housing sector should lead the recovery in the United States.

The dollar retreated in choppy, desultory trading as fairly solid economic data failed to meet the market's lofty expectations set after a series of consensus-busting numbers in the past few sessions. This left the U.S. currency vulnerable to squaring of long positions when the dollar breached some crucial technical levels.

European inflation numbers and US corporate earnings are likely to dominate global financial markets bereft of heavy-duty economic news. US Federal Reserve Chairman Alan Greenspan, meanwhile will be amongst U.S. Central Bank speakers next week who will also compete for investor attention.

Range for the week : $1.1400 - $1.1900.

Japanese Yen

Against the yen, the dollar was helped by wariness about Japan's yen-selling intervention to curb the yen's export-hurting appreciation.

However, traders noted uncertainty about Japan's forex policy ahead of Bush's visit to Japan later in the week. Traders also raised their level of alert after Bush said markets should determine the value of currencies.

Bush also told Asian journalists he would press Japan and China at next week's meeting of the Asia Pacific Economic Co-operation (APEC) forum to loosen up their currency policies as a way to lower trade barriers.

At the same time, he expressed support for a strong dollar, but many in the market consider the comment as merely lip service to a discarded policy.

Meanwhile, Zembei Mizoguchi, a senior finance ministry official, said that Japan agreed with the United States' declared stance of supporting a strong dollar policy and its view that currency rates should be set by markets. He also reiterated that currencies should move in a stable manner, noting that the recent rise in the yen was starting to correct on its own.

The comments helped the greenback move back above the 110.00 levels against the yen. Last day of the week witnessed the dollar strengthen against the yen after government officials reported a string of lukewarm comments from a meeting between US President George W. Bush's talk with Japanese Prime Minister Junichiro Koizumi.

The President reportedly told the Japanese leader that markets should determine exchange rates. This comment presumably was a call for Japan to stop weakening its currency in support of its export market.

But Bush blunted his comment with continued insistence that the US supports a strong dollar. Bush also plans to attend a summit in Bangkok starting Monday. Analysts believe the President will use the opportunity to discuss China's Yuan peg to the dollar.

Range for the week: 107.00 - 112.00

Sterling

Sterling eased from last week's four-month peak against the dollar and recouped ground versus the euro after comments from ECB President Wim Duisenberg that markets may have misunderstood last month's Group of Seven call for more flexible currency rates, boosted the dollar and pushed sterling below the $1.6600 levels.

Sterling continued to trade lower as the greenback's rebound took the market's attention away from news of slowing UK inflation. Britain's underlying inflation rate dropped back slightly last month to 2.8 percent, from the previous month's 2.9 percent.

It marked the 11th month that core inflation was above the BoE's 2.5 percent target. Meanwhile, BoE Governor Mervyn King said the central bank would not need to keep interest rates as low as they are if the world economy recovers.

Interest rate expectations have been a key support for sterling with many in the market expecting the BoE will be the first of the major central banks to hike rates in the coming months. U.K. interest rates of 3.5 percent already outstrip those of the eurozone, at 2.00 percent and the United States at 1.00 percent.

The Bank of England's Monetary Policy Committee's October meeting minutes are due next week and will be of focus. The Bank has always said its July rate cut was a precautionary one and it could infact be taken back if house prices and the economy continue to pick up.

Range for the week: $1.6500 - 1.7000