Euro on a roller-coaster ride

Euro

The dollar kicked off the week on a firm foot against the euro after its biggest rise in five months, as traders looked ahead to what might emerge from the upcoming Group of Seven (G7) meeting.

In addition, dollar was well supported on growing concerns among European officials about euro's sharp gains. Euro zone officials expressed their worry about the pace of euro gains.

Furthermore, data showed that the euro zone's trade surplus almost halved in November to 5.0 billion euro's from October's 9.6 billion euro's as exports declined and imports picked up speed.

As the week progressed the dollars week-long rally crumbled when it dropped some 2 percent against the euro as investors re-tested Europe's resolve over curbing the ascent of the euro.

Statement from the meeting of euro zone Finance Ministers and the European Central Bank signalled a green light to buy back the euro. The usual wording of wanting a strong and stable currency was scrapped for concerns about excessive volatility.

Moreover, ECB Chief Economist Otmar Issing said Europe's recovery was on track despite some damping effect on exports from the stronger euro.
The dollar continued its down trend as financial markets refocused on the persistent U.S. current account deficit and perception grew that its rebound from last week's record against euro had run it course.

News that euro zone inflation fell towards the ECB's comfort levels in December, to 2 percent, had little impact on the euro. The ECB has faced calls from some for a cut in interest rates, including German Economy Minister Wolfgang Clement, to deal with the steadily rising euro.

However, European Central Bank Governing Council member Nout Wellink was quoted as saying that the euro's rise against the dollar was not excessive and that interest rate moves were not appropriate means to affect currency swings.

Furthermore, head of Germany's BGA foreign trade association said the current level of euro did not threaten German exports and did not see the need for intervention from the European Central Bank.

BGA head Anton Boerner added any ECB intervention would have at best a short-term effect.Boerner and Wellink remarks contrast with recent concerned comments from European politicians and central bankers, who have tried to talk down the euro with calls for interest rate cuts and veiled reference to the possibility of ECB intervention.

Slightly upbeat weekly U.S jobless claims data did little to help the dollar. Claims fell by 1,000 to 341,000 in the week to Jan 17, below estimates of a rise to 347,000.

At the last trading day dollar managed to regain some of its losses after a diplomatic source told that euro zone ministers attending a Group of Seven meeting next month will say that further strength in the euro could cause the European Central Bank to cut interest rates.

He further added that current euro zone monetary policy supports growth, however, external shocks, including those coming from foreign exchange markets, could reduce growth.

Next week Federal Reserve's monthly rate-setting meeting and the latest U.S. growth figures would be touchstones for financial markets, in addition to policymaker's views on a rising euro. The (FOMC) Federal Open Market Committee is widely expected to keep its key rate on hold at 45-year low of 1 percent.

Range for the week: $1.2350 - $1.2850.

Japanese Yen

At the start of the week dollar was trading above 107-yen, underpinned by wariness of intervention by Japanese authorities, who spent more than 20 trillion yen ($186.4 billion) last year to curb the yen's export-crimping rise.

Japan upgraded its assessment of its economy, saying strong exports are bolstering output, capital spending and beginning to filter through to chronically weak consumption.

However, the monthly report issued by the Cabinet Office warned that yen's recent strength could be a threat to business conditions. Japanese Finance Minister Sadakazu Tanigaki delivered a fresh warning against the yen's rise in his parliamentary speech, warning that the government would keep intervening if it saw the need.

The dollar hit a two-week high of 107.92 against the yen after the BoJ made a surprise easing in monetary policy. BoJ's decision to raise its target range for excess liquidity in the banking system to 30-35 trillion yen ($280-326 billion) from 27-32 trillion, was read by markets as a sign of concern about export-damaging yen strength.

However, the dollar was not able to maintain its gains as many Japanese exporters took the latest bounce as an opportunity to convert their dollar receipts into yen at relatively favourable levels.

The minutes from the Bank of Japan's December 15-16 meeting showed members of the policy board agreed that moves in the foreign exchange market needed close monitoring.

Range for the week: 104.00 - 109.00

Sterling

At the start of the week sterling was trading above $1.8000 against the dollar. A report by accounts Ernest and Young predicted that British economy would grow by 3.0 percent this year.

However, sterling pared its gains and dropped to the low of $1.7822 as investors who piled funds into the British currency at the start of the year questioned their judgement. Moreover, data out of UK showed that growth of worker's earnings fell and manufacturing output dropped unexpectedly.

As the week progressed sterling roared across the board after UK inflation data helped to keep the fire burning under expectations of an imminent interest rate hike.

The old measure of inflation, or RPIX, showed annual price growth at 2.6 percent year-on-year in December, up from November's 2.5 percent.

Markets expect the BoE to tighten policy in February. Sterling's rise against the dollar was also driven by renewed selling of the dollar, which took it down versus the euro.

Sterling added to its bullish tone as the Monetary Policy Committee said in the minutes of its January policy meeting, a gradual rate rise would be necessary if the domestic economy grew as was forecast in November.

The minutes showed Deputy Governor Andrew Large voted for an immediate quarter point hike in rates to 4 percent.

At the last trading day better than expected UK economic data gave sterling only a short-lived boost as investors booked profits on the pound's recent rally. Data showed Gross Domestic Product rose by 0.9 percent in the fourth quarter last year, its strongest rate in almost three years.

Furthermore, Retail Sales in the key December shopping period also rose more strongly than expected, showing a healthy year-on-year gain of 4.0 percent.

Financial Markets are looking towards next week, as Prime Minister Tony Blair will be facing possibly the toughest time of his term. A debate on controversial legislation and a key report on last year's suicide of a government weapons expert David Kelly are both due then.

Range for the week: $1.8050 - 1.8550.