US dollar gains versus euro

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. May producer prices rose 0.8 percent, compared with economists' forecasts for a rise of 0.6 percent.

Excluding food and energy, prices rose 0.3 percent, compared with economists' forecasts for a rise of 0.2 percent. The dollar was holding its ground after the Conference Board's leading indicators report for May showed a rise of 0.5 percent, exceeding economists' forecasts for a rise of 0.4 percent.

The dollar ended the week on a soar note after a report showed the U.S. current account gap widened more than expected in the first quarter. The current account deficit widened to a record $144.9 billion in the first quarter, exceeding economists' forecasts of a $141.0 billion gap.

The wide current account deficit, the broadest measure of the nation's global trade, has been a persistent drag on the dollar over the past two years.

U.S. economic data is light in the coming week, with May durable goods numbers on Thursday and the final estimate of economic growth in the first quarter on Friday being the highlights. In Europe, the June Ifo survey, released on Friday, should add to evidence that the euro zone economic recovery is gathering strength.

Range for the week: $1.1960 - $1.2260.

Japanese Yen

The yen started the week steady against the dollar, as investors awaited clues on interest rates in the United States and Japan.

Tokyo traders were also focusing on what Bank of Japan Governor Toshihiko Fukai would say about a recent rise in yields on Japanese long-term bonds after the BOJ left monetary policy unchanged at its meeting as expected.

Even though the BOJ kept monetary policy unchanged, it upgraded its view of the economy, highlighting its dilemma over a combination of rising bond yields and lingering deflation. The yen received a boost after the BOJ upgraded its view on the Japanese economy and was further supported by a rise of 2.25 percent in Tokyo's Nikkei share index.

Market expectations that a rate hike in the United States would be more measured also helped the yen's rise. The yen ended the week on a six-week high of 108.57 against the dollar due to weaker-than-expected current account report.

The coming week will see Japanese inflation numbers which may cause a stir, as markets debate when Japan's ultra loose monetary policy will be tightened as the economy rebounds.

Range for the week: 108.00 - 111.00

Sterling

Sterling hit its lowest level in almost three weeks versus the dollar at the onset of the week, pressured by the greenback's broad rally and worries over British policies after the ruling Labour Party suffered heavily at the polls.

Results from European and local elections showed voters punished Prime Minister Tony Blair for waging war in Iraq. Blair's Labour party was pushed down to its lowest level since World War one in European elections.

Furthermore, data showed higher oil prices pushed British factory gate prices at their fastest annual pace in over seven years, but the headline number of a 0.3 percent monthly rise came in lower than expected.

However, the pound rose broadly after U.S. inflation figures pushed down the dollar by hinting U.S. interest rate hikes might be more gradual than some in the market expected.

Sterling's rise was also helped by hawkish comments from BoE governor Mervyn King and a rise in inflation that reinforced expectations British interest rates were headed higher. Soaring oil prices pushed UK inflation to its highest level in over a year in May.

BoE governor Mervyn King said that it was impossible to say how far interest rates might have to rise in the UK for the bank to meet its inflation target of two percent.

King's comments were followed by UK chief economic advisor to the Treasury Ed Balls warning that no one could afford to be complacent about the risks to stability of the booming housing market, adding that policymakers were carefully watching the situation.

Sterling rose against the dollar at the end of the week after better-than-expected domestic retail sales data, which was up 0.8 percent on the month, beating analysts' consensus estimate of 0.6 percent.

Furthermore, weak current account numbers from the U.S. also helped push sterling higher. This week, the Bank of England (BOE) will release the minutes from its meeting earlier this month.

At that meeting the BoE lifted borrowing costs for a second straight month, stepping up the pace of its monetary tightening. Furthermore, BoE Governor Mervyn King and other Monetary Policy Committee members will be watched closely when they speak before the parliament's Treasury Select Committee on Thursday.

Range for the week: $1.8150 - $1.8450