US dollar up on economic optimism

Euro

The week started with the dollar bulls pushing the greenback higher against most major currencies as investors awaited for more positive data from US starting from manufacturing data to payroll figures.

Strong US economic reports were seen as a sign of continued fast US growth during the fourth quarter after a 7.2 percent expansion in the
third quarter. Strong manufacturing and construction data beat expectations and drove home to investors that the US economy is firmly in recovery mode.

The Institute for Supply Management said its October purchasing managers' index was 57.0, the highest since January 2000, overstepping consensus forecast of 56.0. US construction spending for September rose 1.3 percent, exceeding forecast of a 0.3 percent rise.

Greenback's run to the top was briefly interrupted by a gloomy US job survey, which threw cold water on optimism on the economy.

Job placement firm Challenger Gray & Christmas said the number of job cuts announced by US employers surged 125 percent last month after
declining in the two previous months.

As the week progressed, the mighty US dollar gained momentum an each and every data. Institute for Supply Management's October non-manufacturing index showed a reading of 64.7, beating consensus forecast of 63.0. The employment component rose to its highest level in three years.

A separate report showed US September factory order rose 0.5 percent, just under forecast. By this time of the week US dollar started trading in well-defined range against all major currencies as traders waited for the all-important speech from the Federal Reserve Chairman and the US non-farm payroll data.

In his speech, Alan Greenspan, chairman of the US Federal Reserve, signalled that interest rates should remain low in the US despite firming evidence of recovery in the jobs market.

He largely reiterated the Fed's existing stance on policy: that an increasingly strong economic recovery need not imply early rises in interest rates as long as the prospects for inflation remained low. He spoke soon after the Labor Department reported an unexpected drop in new claims for unemployment benefits. They fell by 43,000 to 348,000, their lowest weekly level since January 2001.

Some of that fall reflected the effects of a strike the previous week in California, but the four-week average still slid to its lowest since the recession began in 2001. Though the labour market had been weak, Mr Greenspan said, 'the odds increasingly favour a revival in job creation'.

If companies began to rebuild their inventories in reaction to stronger demand, it could lead to a significant pick-up in hiring, he said.

Nonetheless, Mr Greenspan said that there was 'scant evidence' that stronger growth was as yet giving companies the power to raise prices and boost inflation. 'In these circumstances, monetary policy is able to be more patient,' he said.

In Europe, the European Central Bank left its key interest rate unchanged at their regular monthly policy setting meeting chaired for the first time by the banks newly elected President Jean-Claude Trichet.

Many ECB watchers believe that the cycle of rate cuts in the euro zone is now over and the next move in the interest rates will be upwards, even if such a move is still some way off. The ECB for its part deemed that no monetary tightening was necessary for the time being in the 12 countries that share the euro, where growth remains very sluggish.

In other news, French Finance Minister Francis Mer promised fresh deficit-reduction measure to keep critics at bay. Mer, under fire for France's breach of the EU stability pact and the deficit limit of the accord, secured an EU trace until the end of the month, and perhaps a lasting peace, with an offer to trim the French 2004 deficit by more than so far conceded.

The euro shrugged off data showing euro zone service sector activity surged last month to its highest level in nearly three years, while jobless rate in the 12-nation bloc held steady at 8.8 percent.

Hotly anticipated as the pivotal economic data event of the week the US monthly employment report appeared to signal that the world's biggest labour market was turning around.

Non-farm payrolls soared to 126,000 in October, shattering economists' consensus expectations for a comparatively modest rise of 58,000 in October. The US unemployment rate dropped to 6.0 percent in October as companies added thousands of new jobs for the third straight month.

After the release of the figures, greenback skipped higher and touched a new high of 1.1376 against the euro and 1.3805 against the Swiss
franc.

All good things must come to an end, the dollar fell on the last few hours of the last trading day, giving up some gains built over the week.

Profit taking on long dollar position was sparked by rumours in the market that the US terror alert level as been raised. The Department of Homeland Security quickly squashed the rumour saying the alert status remains at 'yellow'.

Range for the week: $1.1300 - $1.1800

Yen

Dollar/yen started the week on a strong note touching a one month high of 111.50 at the beginning of the week up from 3 year lows just a couple of weeks ago.

Pushing the dollar higher was the release of US construction data. Japanese exporters quickly rushed in to take profit and pulled the dollar lower from the highs of 111.50 yen to take advantage of its rebound.

As the week progressed Japanese yen traded side ways, with exporters selling US dollars above 110.00 yen while upbeat economic numbers from United States protecting the down side.

In other news, US Treasury Secretary John Snow told an annual meeting of the US Japan Business council that Washington's backing for flexible exchange rate did not mean the Bush administration was backing away from its long standing 'strong dollar' policy.

Market will be casting an eye on Sunday's election for the Japanese parliament's Lower House. Although Prime Minister Junichiro Koizumi's ruling coalition is widely expected to retain a majority, if he fails to win the yen could fall on political uncertainty.

Range for the week: 107.00 - 112.00

Sterling

Sterling steered a steady course, holding just below recent five-year highs against the dollar, as strong British manufacturing and retail data cemented expectations of an UK interest rate hike later in the week.

British manufacturing output shot up at its fastest pace since 1996 while retail sales growth hit 1-1/2 year high. Midweek, sterling shot higher amid expectations that Bank of England would raise interest rate for the first time in four years.

A view that gained momentum after Reserve Bank of Australia raised its official cash rate by 0.25 percent to 5.0 percent, triggering a spike in the Aussie dollar and boosting other relatively high yielding currencies such as sterling.

As expected Bank of England raised its interest rate by a quarter percent to 3.75 percent, the first increase by any of the world's top four central bank in more than three years.

Most analysts had predicted a hike to calm burgeoning consumer debt levels and booming house prices as survey after survey indicated that recovery in the fourth largest economy is at hand.

The bank issued a statement saying there was evidence of a board based economic recovery and said it had run out of patience with the housing market and consumers who continue to spend and pile on debt at a furious pace.

By the end of the week sterling gave up most of its gains on profit taking and scaling back expectations of future interest rate hike.

Range for the week: $1.6550 - 1.7050