Little cheer for the US dollar

Euro

The U.S dollar started the week trading in tight ranges against its major rivals despite an upgrade of Washington's alert level on the ivelihood of a terrorist attack on the U.S. soil.

The U.S. government raised its terror alert to 'orange', the second-highest level, citing a high risk of militant attacks around the holiday season in the United States that could be bigger than the September 11 attacks of 2001.

Trading was thin and worries over the alert were somewhat offset by news that Libya had said it would scrap all of its weaponsof mass destruction. Midway through the week a holiday-thinned market brushed aside robust U.S. data and hesitated to react to news that mad cow disease had been discovered in the United States.

U.S. Agriculture Secretary Ann Veneman announced that the first case of the deadly mad cow disease, which devastated parts of the European agriculture industry in the 1990s, had been found in a Holstein cow in Washington State.

Geopolitical concerns overshadowed a series of upbeat U.S. data and survey results, including the ABC News/Money Magazine Consumer Comfort index, which climbed to a 17-month high of -9 last week from the previous week's reading of -11.

University of Michigan's consumer sentiment survey, a key gauge of consumer's views on the economy and their personal finances, came in at 92.6 in December, beating market expectations for 91. The final reading stood at 93.7 in November. U.S. thirdquarter gross domestic product came in at healthy annualised 8.2 percent, in line with
market expectations.

Comments from European officials, approving the rise in the euro, were also lending a helping hand to the euro. European Union Trade Chief Pascal Lamy said that the euro's current value was 'not yet worrying' although it was essential that currencies did not move fast.

Santa's goodie bag failed to lift the greenback during the Christmas season as news that the Delta Air Lines terminal at News York's La Guardia Airport had been evacuated after a passenger breached security, increased worries over possible terror attacks during the holiday period.

The incident came just hours after the French government asked Air France to cancel Paris-Los Angeles flights after the U.S. intelligence identified a 'credible' threat to the carrier.

The dollar was in no mood to celebrate Christmas as weak data out of the United States saw it hovering near fresh lows against the euro. U.S. durable goods orders fell 3.1 percent in November to a seasonally adjusted $180.07 billion, defying Wall Street economists' expectations of a 0.8 percent rise.

Orders tumbled on the heels of a revised 4 percent increase in October. Sales of new single-family homes fell 2.4 percent to a seasonally adjusted 1.082 million unit annual rate last month. Most forecasters had anticipated a rise in sales to 1.120 million.

Meanwhile, fallout from the mad cow scare continued, as Australia joined the list of countries, including Japan, South Korea, China and Mexico that have temporarily banned the import of U.S. beef. Canada has imposed a partial import ban on U.S. beef and cattle products.

On the economic scene, most of the next week's key data will fall on Tuesday, when reports on consumer confidence and business activity in the U.S. Midwest are released.

The National Association of Purchasing Management-Chicago's business barometer is expected to slip to 62.2 in December from 64.1 in November.

Additionally, the Institute of Supply Management, or ISM, will report its monthly index for manufacturing activity on Friday. Economists expect the December reading at 61.0, down slightly from November's 62.8.

Although the data is expected to continue to show the economy is experiencing a strong rebound, little impact is expected on the dollar due to upcoming holidays.

Range for the week: $1.2200 - $1.2700

Yen

The yen commenced the week little changed against the dollar after Japan said it would raise the borrowing limit for its foreign exchange account, giving it more flexibility to counter a buoyant yen that officials feared could stall an export-led economic rebound.

Finance Ministry officials confirmed a widely expected move to raise the self-imposed limit to 140 trillion yen ($1,301 billion) in the fiscal year starting next April from 79 trillion yen.

The Japanese government had intervened heavily in the currency market this year to stem the rise in the yen, which this month touched its highest level of 17.8 trillion yenagainst the greenback in more than three years.

The yen didn't react much to Japanese trade data which showed that the country's trade surplus continued to bulge in November, although both exports and imports were down from a year earlier in yen terms, due in part to a higher Japanese currency.

Japan's customs-cleared trade surplus rose 11.3 percent in November from a year earlier to 990.16 billion yen ($9.18 billion), up for the fifth consecutive month. The all-industries activity index, seen as a close proxy to GDP, rose 0.8 percent in October from the previous month.

The end of the week saw the yen close a tad higher against the greenback with only intervention fears from the Japanese authorities keeping it above the 107 level.

Finance Minister Sadakazu Tanigaki, repeating his warnings against the yen's recent gains against the dollar, told a news conference that Japan would act on exchange rates if the market strayed from economic fundamentals.

The Japanese Ministry of Finance also said the Bank of Japan has agreed to a government request for short-term funding to soothe worries it may soon run out of funds to intervene in the currency market.

The BoJ policy board agreed to issue three-month repo pacts for up to 10 trillion yen, but noted that this was a temporary, precautionary measure.

Range for the week: 105.50 - 110.50

Sterling

Sterling started the week lower against the dollar mainly due to its sharp fall against the euro. The pounds underperformance was driven by year-end conversions of gilt coupons and share dividends into euro.

The currency was largely unmoved by economic data which showed upbeat growth but a disappointing current account deficit. The economy expanded faster than previously estimated in the third quarter, growing by 0.8 percent from the previous three months and by 2.1 percent against the same period last year.

Analysts had expected a growth at 0.7 percent. Despite the fastest quarterly growth since the third quarter of 2002, the current account deficit swelled to 8.1 billion pounds ($14.29 billion).

The third quarter current account deficit was the highest since the last three months of 2000 and was driven by a larger shortfall in trade in goods. However, the end of the week saw the pound rise quickly to its recent 11-year high against the greenback, mainly due the euro's rise against the dollar.

Further assisting sterling's rise was strong third quarter figures, which raised expectations that the Bank of England may raise interest rates from 3.75 percent when it meets in February, further increasing the yield advantage over the U.S.

Range for the week: $1.7500 - 1.8000