A tough week for the US dollar

Euro

The euro started the week on a soft tone against the dollar mainly due to the comments issued after a two-day (G7) meeting in the Florida resort of Boca Raton.

Finance chiefs from the Group of Seven (G7) warned against 'excess volatility' in currency markets. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth,' the G7 said in a communiqué, on top of its boilerplate phrases such as that the group continues to monitor foreign exchange markets closely.

However, greenbacks rally quickly lost steam on a growing perception that the G7 warning was little more than lip service and that any co-ordinated action to stop the dollar's two-year decline was highly unlikely.

Furthermore, a huge U.S. current account deficit and speculation that Washington tacitly approves a weaker dollar to shore up the economy also dent dollar's sentiment.

The dollar did get a bit of help from a published report which said European Union finance ministers will discuss 'all possible ways' to curb euro gains. The Dow Jones report, which quoted an unnamed European Union Official, triggered a mild sell-off in the euro.

However, with no real action seen to curb the euro's rise it continued to climb against the dollar. Meanwhile, ECB Chief Economist Otmar Issing was quoted as saying the bank's monetary policy was extremely well positioned and that aiming to stoke growth would be pointless.

Furthermore, Euro Zone finance ministers said after a meeting at the beginning of the week, that they had not discussed intervening in the foreign exchange market to curb the euro's strength, contradicting a press report quoting an unidentified European Union official as saying finance ministers would discuss all possible ways to curb euro gains.

Midway through the week, the euro rose to a one month high against the dollar after Federal Reserve Chairman Alan Greenspan dismissed worries about the weakening dollar, saying it has had little impact on inflation.

The Fed chief, in his semi-annual report on monetary policy to the U.S. House of representatives Financial Services Committee,
said the inflationary impact of the dollar's slide had been minimal so far because foreign exporters were hedging their profit margins and therefore were not passing on higher prices to U.S. consumer.

He further put pressure on the dollar when he said its decline should help narrow the bulging U.S. current account gap and gave no hints as to when U.S. interest rates were likely to move up from its current levels of 1 percent.

The end of the week saw the greenback recover against the euro amid a wave of profit taking in the euro after the Single European Currency hit a near-record high of $1.2898.

Earlier, the dollar fell sharply against its major counterparts after a report showed U.S. trade deficit widened sharply and a surprising weak consumer sentiment survey. Data showed the trade deficit grew nearly 11 percent in December to $42.48 billion, more than analysts' forecast of $40 billion.

Markets were also annoyed by rumours of intervention by the European Central Bank after the euro fell a full cent in less than half an hour, reversing gains posted after the softer-than-expected U.S. data.

Intervention rumours were fuelled by the sale of some 2 billion euros by a big European Bank. Traders, however, were unable to confirm ECB's presence in the foreign exchange market.

Next week markets will be focusing on testimony by European Central Bank President Jean-Claude Trichet, which is likely to fuel debate on future interest rate changes. The German ZEW institute reports its key sentiment index for February on Tuesday.

Range for the week: $1.2600 - $1.3100

Yen

The Japanese currency remained under pressure due to intervention fears by the Japanese authorities after Japanese Finance Minister Sadakazu Tanigaki said the statement urging more currency flexibility at the G7 meeting was not aimed at Japan, brushing aside speculation that Japan's massive dollar-buying intervention was also
under fire.

Japan sold a record 20 trillion yen ($188.8 billion) last year and another seven trillion yen last month to curb the yen's export-hurting rise. Moreover, Japanese vice finance minister for international affairs, Zembei Mizoguchi, told reporters that Japan's foreign exchange policy is unchanged from before the weekends Group of Seven
meeting.

Additional comments from Tanigaki that the country's intervention in currenc markets was not aimed at keeping the yen at a particular level but that it would take decisive steps against excess moves, was making traders proceed cautiously.

Midweek, the dollar fell to three-year lows of 105.18 yen, after Greenspan's speech, but recovered to 105.70, fuelling expectations that Bank of Japan may have intervened by buying dollar.

However, this could not be confirmed. Huge selling pressure from Japanese exporters repatriating profits as well as foreign investors buying Japanese assets was seen as a factor supporting the yen.

The Finance Ministry announced that net purchases of Japanese bonds by foreigners rose to 1.3344 trillion yen ($12.66 billion) in January, the highest level since January 2001 and more than twice their buying of 567.9 billion yen in December.

Range for the week: 103.50 - 108.50

Sterling

Sterling started the week on an 11 year high against the dollar after a Group of Seven statement warning against excess currency volatility failed to deter dollar bears.

However, a surprise fall in British manufacturing data capped sterling's rise. Data showed manufacturing output fell for a second month in December, casting doubts for the sector's recovery and denting expectations for a rise in UK interest rates.

Further data showed Britain's December goods trade gap at 4.16 billion pounds, less than expected. This bought the full-year total to a deficit of 46.4 billion pounds, just short of 2002's high of 46.6 billion, the widest since records began in 1697.

Sterling continued to glow in dollar's weakness and kept surging to new 11 year highs against the greenback amid a report by Bank of England which said it expected inflation to pick up sharply this year, increasing market expectations that British interest rates, which currently stand at 4.0 percent, will be moving higher.

Sterling ended the week on a softer note against the greenback after rising as high as $1.8986 due to weak U.S. data and on the outlook for higher UK rates. Potentially damaging for the pound was talk that mobile phone giant Vodafone Group was planning a $35 billion bid for U.S. rival AT&T Wireless.

Next week British retail sales data will renew debate on whether the Bank of England (BoE) will repeat February's rate hike soon in an effort to curb consumer debt.

Range for the week: $1.8600 - 1.9100