Dollar in a strong rally

Euro

The week started with US dollar at record lows against the euro, sterling, Swiss franc, Japanese yen and other major currencies.

US Treasury Secretary John Snow said that despite disappointing job growth, the US economy is on an upswing that will lead to increased employment. He also reaffirmed the administration's commitment to cut in half in five years the record federal deficit, which has drawn fire from a number of economic groups.

Snow also said the federal budget that President George W Bush will soon propose would reflect that administration's vow to reduce the deficit, largely by slowing the growth in spending.

While John Snow gave indication that the US economy is showing signs of recovery, financial market was a bit weary of moving the greenback higher until European Central Bank President Jean-Claude Trichet said that the world's top central bankers are concerned about excessive currency moves.

Trichet, speaking after a meeting of G10 central bankers in Basel, Switzerland, said 'brutal' moves in the currency market were not welcomed and not appropriate. Immediately after his comments, euro lost 1 cent against the dollar.

As the week progressed, Bundesbank President, German Economic Minister, German Chancellor Gerhard Schroeder and French Finance Minister all expressed concerns about the economic impact of the euro's 40 percent rise against the US dollar.

ECB council member Ernst Welteke said ECB is closely watching the euro movements and its impact on exports. All the European finance official gave indications of Europe being uncomfortable with euro rate.

More jawboning from European policymakers towards the end of the week also helped the ailing greenback recover from its recent lows.

Federal Reserve Chairman Alan Greenspan led the US team, telling a Bundesbank seminar that the dollar's decline has yet to cause inflation or deter foreign capital inflow that is needed to fund the gaping US current account deficit.

The weaker dollar has triggered a surge in US exports, reducing the country's yawning trade deficit. The US trade gap - the amount by which the cost of imports exceeds export revenues - fell to $38 Bio in December, its lowest level in 13 months.

The figure, which undershot the $42 Bio pencilled in by forecasters, reflected a surprise jump in exports of aircraft engines and other industrial goods.

Analysts said US exporters had been helped by the weaker dollar. Other favourable US economic data also helped push the dollar higher. Upbeat US manufacturing data for January and a better than expected weekly jobless claims report overshadowed a smaller than expected rise in December retail sales.

Consumer inflation data rose slightly, as expected, indicating no need for increase in official US interest rates.

By the end of the week, the greenback gained the most in almost five months against the euro after the Treasury Department said foreigners poured a net $87.6 billion into U.S. financial assets in November, more than triple the October level.

November's net foreign inflow into U.S. securities was 20 times higher than in September. Purchases dwindled to $4.3 billion that month, sparking concern low U.S. interest rates were deterring international investors from funding record current account and budget deficits.

The dollar fell the most against the euro in more than 2 1/2 years in the month of November, when the September report was released. Gains for the U.S. currency accelerated after a University of Michigan report showed consumer sentiment this month had its largest jump in more than a decade.

U.S. consumer confidence this month surged to the highest in three years, boosted by the stock market's first annual gains since 1999 and underscoring forecasts for stronger growth this year.

The University of Michigan's preliminary measure of consumer sentiment jumped to 103.2 from December's 92.6. The increase was the largest since November 1992. The Federal Reserve said December factory production rose 0.3 percent, the fourth monthly gain, while total industrial production gained 0.1 percent.

Range for the week: $1.2000 - $1.2500

Yen

Dollar/yen traded in a tight range for most of the week with fears of intervention by Bank of Japan supporting the dollar and exporter selling interest above 106.80 capping its rise.

Japanese Finance Minister Sadakazu Tanigaki said that recent foreign exchange moves had been rapid given US economic fundamentals. He also reiterated Tokyo's stance that it would take decisive action in the currency market to counter any overshooting in exchange rates, keeping the market wary of pushing the dollar below 106 yen.

Some analysts say Japan has already conducted five trillion-yen or so of intervention this year. Before the end of the week, Japanese yen, which has gained 10 percent against the dollar in the past year, weakened to 106.63 yen per dollar.

The Bank of Japan has sold record sums of yen to stem the appreciation. The euro had its biggest weekly drop against the yen since August, falling 3.5 percent to 132.16 yen. Japan spent a record 20.1 trillion-yen ($189.4 billion) last year through Dec. 26 to stem the yen's rise.

About 80 percent of Japanese companies said they would be hurt if the yen trades between 100 yen and 105 yen to the dollar, the trade ministry said in Tokyo, citing its own survey of companies.

Before the week ended, the Bank of Japan was suspected of conducting another intervention after Japanese yen shot up from a low of 105.70 yen.

Range for the week: 105.00 - 110.00

Sterling

At the start of the week, sterling stormed to its highest level (1.8577) against the dollar in 11 years but pared gains after European Central Bank chief Jean-Claude Trichet expressed concern about 'brutal' foreign exchange moves.

Sterling continues to draw support from attractive yields and the prospects of higher UK interest rates in the month to come.

Also aiding the dollar was the release of UK manufacturing data. Office for National Statistic data showed output in UK manufacturing, a sector which has been showing signs of recovery, tumbling 0.7 percent, its worst since October 2002. Other data showed UK industrial production was down 0.4 percent in November last year.

Strong UK employment data had little impact on the pound. By the end of the week, sterling rose to a two-month high against a weaker euro but also slid to one-week lows against the US dollar and closed below 1.8000 on profit taking and broadly tracking moves in major currencies.

Range for the week: $1.7850 - 1.8350