An eventful week for forex (page 1 of 2)

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.