US dollar heading even lower

Euro

Thin trading due to a holiday in Japan resulted in the dollar consolidating its position after last week's record lows against the euro.

A brewing trade war between the U.S. and China weighed on the dollar and Washington's announcement that it would impose quotas on some
imports of Chinese textiles sparked fears that protectionist policies might slow down the US economy.

A spate of violence in the Middle East resulted in tepid market conditions with investors inching away from the US currency. The release of strong
US third quarter GDP figures, which jumped to an annual rate of 8.2 percent, left the dollar broadly steady.

Despite the impressive results, as this was the strongest quarterly advance in 19 ½ years, the markets remained indifferent. The upbeat GDP figures were overshadowed by tensions in the Middle East and deteriorating balance of payments.

The Ifo German business climate index rose to 95.7, the seventh straight month of improvement. This report was higher than market expectations
but had minimum impact.

A rash of positive numbers from the US failed to inspire traders as holiday thinned market conditions ahead of the Thanksgiving resulted in
subdued activity. October US durable goods orders rose 3.3 percent while the Chicago Purchasing Managers index for November rose unexpectedly to 64.1.

However, the so called 'twin deficits' of the US budget and current accounts continued to be the determining factors for the direction of the US currency.

The euro rocketed to a lifetime high of above $1.20 for the first time since its launch in January 1999 as traders capitalised on bearish sentiment towards the greenback. The expiry of sizeable currency option contracts drove the euro higher in a thin post - Thanksgiving market.

The dollar was also hurt as investors tried to anticipate a seasonal dry month of global cross border capital flows usually expected late in December. This tends to disadvantage the dollar as the US is dependent on capital inflows to help finance its current account deficit which is a broad measure of the nations global trade which currently runs at about 5 percent of GDP.

In the coming week, traders will remain alert for the release of key economic data including factory and service sector reports from the ISM
as well as the monthly non-farm payrolls employment report.

With the dollar having failed to receive much support despite the recent robust economic data, currency analysts believe that the greenback remains poised to test further lows against the euro with a breach of $1.22 in the not too distant future.

Range for the week: $1.1800 - $1.2300

Japanese Yen

With Japan on holiday at the start of the week, activity in the dollar-yen commenced on a subdued note.

Commercial buying and expectations of a positive reaction to key US data buoyed the dollar to the 109.40 levels. Having spent much of the week in a tight range, reports of an imminent injection of public funds into a troubled bank as well as weak Japanese data resulted in the Japanese yen slipping against its US counterpart.

Industrial production rose 0.8 percent in October and was lower than the 1.9 percent rise forecast by economists. Japanese unemployment rate rose 5.2 percent in October while its core nationwide consumer price index rose 0.1 percent, thereby giving mixed signals to the market.

Reports that the Ministry of Finance had spent about 1.6 trillion yen in yen selling intervention in November left traders cautious about selling the dollar.

Range for the week: 107.00 -112.00

Sterling

The pound slipped from last week's five-year high against the dollar as prospects of robust US data helped the greenback recover after a week of heavy selling.

The Confederation of British Industry revised its UK growth forecast and said the manufacturing sector was showing signs of improvement. The pound spent much of the week tracking moves in the
euro-dollar and no reaction was observed when UK Finance Minister Gordon Brown confirmed that he had no intention of looking at the case of euro membership at the pre-budget report in December.

The pound returned to the limelight and rose back to five-year highs as the greenback tumbled across the board around mid-week. The pound
continued to remain strong for much of the remaining week as it continued to benefit from general dollar weakness.

Suspicions that UK interest rates may rise soon gained momentum after news that house prices grew a seasonally adjusted 1.2 percent in November according to the Nationwide building society.

In the coming week, the Bank of England is expected to hold a two-day meeting on rates which is likely to generate significant interest. Key manufacturing and service sector surveys are also due for release next week.

Range for the week: $ 1.6800 - $ 1.7300.