US interest rates to rise later this month (page 1 of 2)

Euro

The dollar kicked off the week on a subdued tone against the euro after a lethal attack in Saudi Arabia caused some investors to worry about higher oil prices and increased violence in the Middle East.

The attack by suspected Qaeda militants, in which 22 civilians were killed, was the second strike in a month aimed at destabilising the world's top oil exporter.

As the week progressed the dollar failed to post substantial gains on upbeat U.S. economic data as surging oil prices clouded the outlook for U.S. economic recovery.

The Institute for Supply Management said its index of national factory activity rose to 62.8 in May from 62.4 the prior month, beating expectations of a small decline to 62.0. A measure of factory employment jumped to the highest level in 31 years as the nation's factories marked a full year of recovery.

Furthermore, the commerce department said the construction spending jumped more than expected in April as rising mortgage interest rates spurred a rush to build. Meanwhile, in Euro land manufacturing put on its strongest performance in over three and half years last month as a weaker euro helped boost exports and consumer demand improved in France.

The Reuters Eurozone Purchasing Managers' Index, which measures business activity in manufacturing, rose from 54.0 in April to 54.7 in May, its highest since October 2000 and confounding economists who predicted a fall to 53.8.

The dollar found some support against the euro ahead of an OPEC meeting, which was expected to take some heat of steaming oil prices. Moreover, the dollar benefited after the United Arab Emirates, a member of the OPEC, said it would release an extra, 400,000 barrels a day this month, on the heels of 700,000 barrels per day from Saudi Arabia.

However, the dollar's gains were short lived even after OPEC decided to raise oil output by two million barrels a day. In addition, U.S. Labour department said first time claims for state jobless benefits slipped 6,000 to 339,000, which was above the 336,000 expected on Wall Street.

In Eurozone as expected the ECB left the interest rates unchanged at 2 percent for a 12th straight month. ECB President Jean-Claude Trichet told reporters that in addition to the view that the economic recovery in euro zone has strengthened, the bank sees inflationary pressures over the short-term. His comments dampened speculation of the ECB cutting rates and provided extra support for the euro.

At the end of the week dollar failed to take advantage of much awaited U.S. non-farm payroll data, which came at the high end of expectations but still disappointed investors who had bet that a powerful surge in job creation would boost demand for dollars.

The U.S. economy added 248,000 new non-farm jobs in May, above the median estimate of 216,000 in a Reuter's survey. April's data were also revised sharply upward to 346,000 new jobs from 288,000 as first reported, surprising the market. The unemployment rate stayed steady at 5.6%.

Meanwhile, Fed Governor Donald Kohn said the U.S. economy was not threatened by a wave of worsening inflation that would require a sharp rise in rates, reinforcing current thinking that any rate increases will be gradual.

The financial markets are looking forward to next week's data on U.S. producer prices to see whether it might bolster the case for a larger rate hike than currently expected. The trade deficit is expected to shrink to $44.9 bln after widening in April as imports rose.