An eventful week for forex

Euro

The dollar started the week cautiously against the euro and was trading in wafer thin ranges as traders avoided aggressive moves ahead of a U.S. Federal Reserve policysetting meeting and a barrage of economic numbers including the all important April U.S. payroll data.

A key manufacturing survey, released at the beginning of the week, showed growth in hiring and rising prices for materials, supporting the case for tighter monetary policy. The Institute for Supply Management manufacturing index showed U.S. factories slowed the pace of their output slightly in April. The index fell to 62.40 in April from 62.5 in March compared with economists' expectations of a rise to 63.0.

The euro rose to nearly a month's high of $1.2140 against the greenback after the U.S. central bank decided to leave key interest rates unchanged at 1%. The Federal Reserve's accompanying statement was broadly in line with market expectations in saying that inflation risks were balanced.

The Fed also replaced a promise to be patient on policy with a pledge to move at a 'measured' pace. However, they provided no new information to the market in terms of deciding the timing of Fed's rate hike, denting hopes for dollar bulls that a sharp rise in interest rates was in the works.

The dollar did recover slightly after the U.S. service sector activity index showed a stronger-than-expected reading. The Institute of Supply Management non-manufacturing index rose to 68.4 in April from 65.8 in March, compared with economists' expectations for a 64.0 reading.

Nevertheless, it shed those losses amid profit taking ahead of U.S. employment report, an important gauge of economic growth that could indicate when interest rates would rise.

The end of the week saw the euro fall against the dollar after a weekly report on claims for U.S. jobless benefits offered more positive news on employment. The U.S. Labour Department said first-time claims for state unemployed benefits shrank by 25,000 to 315,000 in the week ended May 1.

Economists' had forecast claims to reach 335,000 from a revised 340,000 the previous week. The euro also came under pressure after the European Central Bank left interest rates steady at 2.00 percent for the 11 straight month, again ignoring request from euro zone political leaders for a rate cut to speed economic growth.

ECB President Jean Claude Trichet stressed that the bank is keeping its options open with no bias on the direction of rates. Trichet cited oil prices heading towards $40 a barrel as a new risk that needs monitoring.

He further added that inflation may go above the ECB's 2 percent benchmark in the next few months. Further fuelling euro's decline was a widely watched monthly U.S. employment report which signalled stronger-than-expected U.S. economic growth, reinforcing the case for the Federal Reserve to raise interest rates sooner rather than later.

The April report showed that non-farm payrolls rose by 288,000 compared with an upwardly revised 337,000 in March. Economists' had forecast a rise of 173,000. The jobless rate dipped to 5.6 percent compared with economists' expectations for an unchanged 5.7 percent. The back-to-back monthly gains in March and April were the strongest in four years.

Next week financial markets will focus on U.S. inflation and retail sales data after strong job figures increased speculation of a rate hike by the U.S. Federal Reserve.

Furthermore, figures for last month's U.S. industrial production and a preliminary University of Michigan survey of consumer sentiment for May, will also be scrutinised for evidence of U.S. economic recovery. In the Euro Zone, preliminary first quarter GDP figures for France, Germany and Italy will be watched closely to determine the extent of recovery.

Range for the week: $1.1700 - $1.2200.

Japanese Yen

With Japan closed for the Golden week holidays, trading was limited to a narrow band during the first half of the week. Midweek saw the dollar fall to 108.33 yen, its lowest level since April 26, ahead of U.S. payroll data, but recovered after receiving support from sluggish share prices in Tokyo.

In addition, the yen was further dented after Yasuo Fukuda, chief cabinet secretary and one of Prime Minister Junichiro Koizumi's closest allies, said he was resigning because he had skipped payments into the state pension plan.

He is one of several cabinet members, including Finance Minister Sadakazu Tanigaki and Economics Minister Heizo Takenaka, who have admitted to not paying pension premiums. The Japanese currency ended the week lower after the U.S. dollar jumped to a nine-week high above 112 yen after better-than-expected U.S. employment report revealed a surprisingly high number of jobs added to payrolls in April.

Range for the week: 109.00 - 114.00

Sterling

Sterling was also trading in ranges at the beginning of the week due to May Day holiday, but jumped two cents higher, midweek, after strong data on British mortgage lending, retail sales and manufacturing sector increased hopes of a rate hike by the Bank of England. Mortgage lending rose at a record pace in March.

Furthermore, Britain's manufacturing sector also showed much strength, as the Chartered Institute of Purchasing and Supply/Reuters purchasing managers' index (PMI) rose to 55.1 in April, compared with 53.8 in March and the consensus forecast for 54.0.

Also helping the pound was higher oil prices, as Britain imports less oil than the U.S. or Europe. However, sterling soon retreated and lost ground against the U.S. dollar as markets were squaring position ahead of an interest rate hike by the Bank of England.

News that Royal Bank of Scotland, Britain's second largest bank, was buying U.S. firm Charter One Financial for $10.5 billion was weighing on the pound as traders speculated on the potential for funds to flow out of sterling into dollars.

The pound gained strength against the dollar after the Bank of England raised interest rates a quarter point, and reaffirmed expectations of gradual increase in British borrowing costs for the rest of the year.

The BoE's third hike since November took the benchmark interest rate to 4.25 percent. The Bank said it saw price pressures building despite the strength of the pound. However, sterling ended the week lower against the dollar as an unexpectedly strong U.S. employment report bolstered the greenback across the board.

After the third quarter point rate hike in Britain since November, investors, assessing whether the central bank is likely to tighten monetary policy again, will be closely watching the Bank of England's inflation report due next week.

Range for the week: $1.7600 - $1.8100.