Concern about the euro's surge against the dollar

European policy-makers have voiced concern that the euro's surge against the dollar was watering down its nascent economic recovery, while Japan's massive intervention has insulated the Japanese economy from a similar impact to some extent.

Euro
The dollar witnessed a roller-coaster ride this week amid speculation that the Group of Seven (G7) nations may do little to turn around the greenback's long declining trend.

Traders were eager for any clues on the thinking of G7 nations, given the unusual tension over currencies.

Despite the desire of European countries for a joint effort to stem the dollar's weakness against the euro, the United States sent a renewed signal on the first trading day of the week, that it was not keen to take such steps.

U.S. Treasury
Undersecretary John Taylor said that the G7 meeting would focus on measures to boost global growth, adding that currencies would be discussed 'as always'. His comments surprised few, reinforcing the markets view that Washington is less troubled by the dollar's recent slide than policymakers in Europe and Japan.

Many analysts think the Bush administration will be reluctant to back any co-ordinated attempt to slow the dollar's decline and question whether a September G7 statement calling for currency flexibility will be altered significantly.

Japanese Finance Minister Sadakazu Tanigaki appeared to toe the same line as Taylor, albeit with nuances. He said the G7 talks would focus on macroeconomic and structural issues but added that currencies would not be left out. Data showing continued expansion in the U.S. manufacturing sector made few ripples, with investors more focused on the release of the January U.S. Non-farm payrolls data and the much awaited meeting of G7 policy makers in Florida over the weekend.

The Institute for Supply and Management's manufacturing index rose to 63.6 in January, the highest since late 1983, from a revised reading of 63.4 the prior month. The January reading was shy of economists' expectations for a rise to 64.0. Meanwhile, the dollar slid against the euro, hurt by a flight to safety after poison was found in a U.S. Senate building. The discovery of the poison ricin in Senate mail rekindled worries about attacks on the U.S. soil such as those that dogged the dollar after the Set.11, 2001 attacks.

The euro peaked against the dollar as an unexpected rise in U.S. weekly jobless claims rattled investors a day before the G7 meeting. But the greenback soon paired losses against the euro after Federal Reserve Board Governor Ben Bernanke said deflation fears had receded 'very substantially', raising speculation U.S. interest rates may rise sooner than anticipated. His comments had particular resonance ahead of the key U.S. employment report, expected to show payrolls rose by 150,000 in January after a puny 1,000 increase in December.

Meanwhile the markets barely reacted to the European Central bank's decision to leave interest rates steady, as expected. ECB President Trichet's post meeting comments on the currency markets were moderate.

He voiced concern about excessive rate movements, but did not use the term brutal, the term used in mid-January when the euro was trading near the 1.2900 levels. Trichet added the current monetary stance was appropriate with import prices helping to keep inflationary pressures low.

The comments reinforce the view that the G7 is unlikely to move away from the Dubai statement, a dollar negative.

On the last trading day, the dollar slipped once again testing lows of $1.2700 against the surging euro, hurt by a disappointing U.S. jobs report. News the U.S. economy created 112,000 new jobs in January, far fewer than the 150,000 the market expected, sent the dollar down more than 1 percent against a range of currencies as investors bet the Federal Reserve would refrain from raising interest rates for sometime.

With the payrolls data out of the way, markets are now focussing on the outcome of the G7 meeting due to end today, to see if there would be any attempt to slow the dollar's sharp decline.

Range for the week: $1.2400 - $1.2900.

Japanese Yen
The dollar continued to dangle above three-year lows of 105.25 set against the yen amid speculation that the G7 may not agree on halting its broad-based decline. But the greenback's fall was limited, as may traders suspected the Bank of Japan, which spent 7.15 trillion yen ($67.2 billion) to prop up the dollar in January, was intervening again.

On the last trading session, the greenback crawled up to one-week highs against the yen as markets bought back the dollar to reduce their market exposure ahead of the G7 meeting. The dollar spiked to 106.25 yen in hectic trade, continuing its advance, sparked after Federal reserve Board Governor Bernanke made upbeat comments on the U.S. economy.

Still, the dollar met heavy offers from Japanese exporters, who are desperate to get rid of dollars they earn overseas, amid a growing consensus that the U.S., Europe and Japan would not be able to agree what is the best course of action for halting the dollar's fall.

Range for the week: 104.00 - 109.00

Sterling
Sterling firmed versus the euro and the dollar after the Bank of England raised its benchmark interest rate by quarter basis points to 4.0 percent as widely expected and kept its option open for further tightening in the future. Sterling therefore is likely to remain supported against both the euro and the dollar in the near future as investors seek to benefit from its relatively attractive yields.

The BoE said in a statement accompanying the rate decision that inflationary pressures were likely to pick up gradually over the next couple of years, holding out prospects of further monetary tightening and even sweeter yield advantage for sterling.

Range for the week: $1.8100 - $1.8600.