Euro slips against the dollar

Euro

The dollar slipped against the euro at the start of the week, struggling to regain its footing after last week's surprisingly weak U.S. jobs data dimmed hopes for an early rate hike by the Federal Reserve.

The dollar lost momentum as the recent weak U.S. payroll data suggested that the Fed would likely keep the benchmark interest rate at the current low level of one percent for sometime. The dollar, meanwhile, hardly reacted to comments from U.S.

Treasury Secretary John Snow, who said that the economy remains 'unusually sound'. Snow also reiterated that the Bush administration advocated a strong dollar and said currency intervention should be kept to a minimum.

Midweek, however, the euro dropped more than 1 percent, testing a low of 1.2185 against its U.S. counter part as investors extended their profit-taking trades after the European currency failed to rally on disappointing U.S. trade data for January.

The U.S. January trade deficit came in at $43.06 billion, compared with a revised December deficit of $42.69 billion. Economist's median forecasts had been for a deficit number of $42.05 billion.

Luck once again switched hands and the euro managed to surge against the dollar, which was weighed down by anxiety in the market about possible further violence around the world following a spate of deadly bombings in Madrid, Spain.

The U.S. currency largely shrugged off U.S. retail sales and jobless claims data that landed broadly in line with expectations, as analysts mulled who was behind the bombings.

Spain blamed Basque separatist group ETA for the rush-hour blasts which killed at least 180 people, but a radical Basque nationalist leader said he did not think ETA was responsible.

On the economic front, in its March monthly report, the European Central Bank confirmed its picture of a gradual euro zone economic recovery with limited inflation risks, signalling unchanged interest rates for some time to come.

The following day, the dollar rebounded as investors took profits on gains made in higher yeilding currencies and ignored slightly weaker-than-expected U.S. consumer sentiment data. The University of Michigan's consumer sentiment index showed a preliminary March reading of 94.1, narrowly undershooting February's final reading of 94.4.

The dollar extended its gains modestly after the U.S. current account deficit came in narrower than market forecasts. The U.S. current account deficit, a broad measure of the nation's global trade was $127.54 billion in the fourth quarter, narrower than forecasts predicting a widening of the gap to $136.50 billion from the third quarter's $135.29 billion.

The coming week, the Federal Reserve's Open Market Committee meeting and the U.S manufacturing survey for February is likely to provide clues to the outlook for economic growth.

Range for the week: $1.2000 - $1.2500.

Japanese Yen

The dollar maintained a steady tone against the Japanese yen for most of the week, drawing support from suspected Bank of Japan intervention to weaken the yen against the greenback.

The dollar tumbled almost a full yen testing 110.20 levels, as talks swirled that Japan, widely suspected of intervening intermittently, had halted buying dollars.

Finance Minister Sadakazu Tanigaki declined to comment on whether Japan had intervened recently. The yen has tended to buck the overall trend in recent days, rising when other major currencies are falling and vice-versa.

One possible explanation ould be the unwinding of so-called yen-carry trades. In yen-carry trade, popular among some hedge funds, one borrows yen, which has low or zero interest rates and sells the currency for other high-yielding currencies.

In the coming week the markets will focus on the U.S. custody holdings for a guesstimate as to the size of the recent intervention.

Range for the week: 109.00 - 113.00

Sterling

Sterling tumbled against the dollar after disappointing British trade and manufacturing output data raised concerns about domestic growth.

The goods trade deficit widened to a record 5.6 billion pounds in January as exports to the United States plunged by 30 percent hit by the strength of the pound against the dollar. Analysts were expecting a deficit of 4.2 billion pounds.

Manufacturing output rose 0.2 percent in January from the previous month against a forecast for a rise of 0.5 percent. The pound crashed to a seven-week low versus the dollar on the last trading day after Madrid's bombings raised global security concerns and hit the riskier, higher yielding currencies. Sterling fell below $1.7910 levels, but closed above $1.8040 levels.

Next week, in Britain, the Chancellor of the Exchequer Gordon Brown takes centre stage when he delivers the budget report followed by the release of the Bank of England's publication of Monetary Policy Committee minutes from the March 3-4 meeting.

Range for the week: $1.7800 -$1.8300.