US dollar gains versus euro (page 1 of 2)

Euro

The dollar rose against the euro at the onset of the week mainly due to speculation that the U.S. Federal Reserve could raise interest rates more quickly than the market expects if inflation speeds up.

The markets were trying to interpret if the Fed will raise by 25 or 50 basis points, ahead of some crucial data throughout the week. Further supporting the raise were comments from Fed Chairman Alan Greenspan that the central bank would do what was necessary to keep inflation in check.

Echoing the same view was Minneapolis Fed President Gary Stern who said central banks have a responsibility to contain inflation. Furthermore, Atlanta Fed President Jack Guynn and Cleveland Fed President Sandra Pianalto said that price stability was essential and that rising U.S. inflation demanded close scrutiny from the Fed, which must preserve its credentials for keeping prices low.

However, the greenback lost ground against the euro after a report showed U.S. trade gap widened unexpectedly to a record in April. The trade gap expanded to $ 48.3 billion, overshooting economists' forecasts of a $ 45.0 billion deficit.

As the week progressed crucial economic data and comments from Fed Chairman Alan Greenspan saw the euro rise to a one-week high versus the dollar.

Alan Greenspan, in remarks at his confirmation hearing, said that rate rises would likely be gradual and that inflation was unlikely to be serious concern in the near future, sounding less aggressive on the pace of interest rate tightening than his earlier remarks.

The comments came after the U.S. consumer price index (CPI) for May showed a rise of 0.6 percent, slightly above economists' forecasts for a 0.4 percent increase, but not enough to satisfy dollar bulls who had hoped for a stronger reading.

But the report showed the "core" CPI excluding food and energy, which the central bank watches far more closely than the overall reading, rose 0.2 percent matching forecast.

Meanwhile, the University of Michigan's sentiment index came in at 95.2, far above economists' forecast of an 89.9 reading, indicating a positive attitude from U.S. consumers.

The dollar briefly recovered some of its losses against the euro after a Treasury Department report on flows into U.S. assets in April was broadly within analysts' expectations. Net inflows of capital totalled $76.2 billion in April, down from the revised $80.7 billion in March, the report said.

Foreign purchases of U.S. assets are an important factor for the dollar, given the wide U.S. current account gap. That deficit, a broad measure of the nation's global trade, has been a persistent worry for the greenback over the past two years.

The dollar further strengthened after fresh U.S. data provided more evidence of an improving economy. U.S. industrial production rose 1.1 percent in May, beating economists' forecasts for a 0.8 percent gain, while housing starts fell less than expected in May and home building permits jumped to a record high.

However, the dollar failed to benefit from a string of robust U.S. economic data at the end of the week mainly due to the fact that markets had already priced in a solid economic recovery and action by the Fed to raise interest rates at its June meeting.

Even though the Philadelphia Fed's gauge of mid-Atlantic manufacturing came in somewhat stronger than expected, the dollar continued trading down due to weakness in some of the index's components. The survey's reading was 28.9, higher than consensus forecasts for a reading of 25.0 Earlier, the government reported that U.S.