Pressure grows on the US dollar

With inflation seemingly under control, many market players believe that the Fed may raise rates only by 25bps, with close adherence to its statement of a 'measured pace'.

Currencies are likely to experience wild swings in the week ahead, with the main focus being on the US FOMC meeting and the hand over of power to the Iraqis, whilst other key economic numbers are also likely to catch the attention of financial markets across the globe.

Euro

The euro commenced the week on a positive note following the previous week's release of a record US current account deficit, which prompted investor concern over the future of US interest rates.

Speculation that the dollar needs to weaken further if the gap is to be closed put the greenback under pressure after market players readjusted their positions due to a shift in the view on US interest rates. The euro was confined to a tight range as the absence of major economic data kept market players at bay, and investors remained on the sidelines.

Most market players kept their focus on next week's US FOMC meeting, with the market having discounted the possibility of a 25bps hike in the US fed funds rate - currently at a historic 4 -decade low of 1.0 pct.

As the week progressed, the single currency of Europe continued to loiter in a range between $ 1.2000 - 1.2200, unable to make any headway due to lethargic trading conditions.

A rise in the German ZEW investor sentiment survey, which rose to 47.4 in June, from 46.4 in May failed to support the euro, with many market players reluctant to bid the euro higher in the wake of next week's Fed meeting.

Comments by US Federal Reserve Board Governor, Susan Bies, who stated that interest rates are too low and should move in line with inflation, had a muted impact on the dollar. The release of weaker-than-expected US durable goods orders data and a spate of terrorist attacks in Iraq and Turkey added pressure on the greenback, but the dollar's losses were limited to key resistance at $ 1.2200.

The euro had its own share of woes, as the much awaited German Ifo index showed a surprise drop to 94.6 in June, from a revised 96.0 in May, and was the lowest on record since September 2003.

The data failed to dampen the euro, as geo-political concerns and uncertainty over the Fed's pace of monetary tightening hogged the limelight; forcing currencies to stick to their ranges.

The greenback's resilience was further tested later in the week, after the release of the final reading of US first quarter GDP data, which was revised down to 3.9 pct, from an initial reading of 4.4 pct. The data took some shine off the dollar, but the presence of inflationary signs in the price deflator spurred hopes that the Fed may have to be aggressive with pushing rates higher.

The dollar was also helped by a rise in the Michigan consumer sentiment index for June, which rose to 95.6 from 90.2 in May and a surprising jump in existing home sales data, both of which indicated that US consumers were returning to their spending habits.

Next week, all eyes would fall on the US Federal Reserve, which will announce its decision on US interest rates on Wednesday, while the release of US consumer confidence, ISM manufacturing index and jobs data will also be watched closely.

Range for the week: $ 1.2080 - $1.2380.

Japanese Yen

The Japanese yen cantered to a fresh six-week high against the dollar at the onset of week, helped mainly by a sharp rise in the Nikkei share index and Japanese bond prices, which attracted investors hoping to see a rise in Japanese interest rates in the near future.

Speculation that the Bank of Japan may consider a shift in monetary policy due to improving economic conditions added support to the yen, as investor appetite for the yen grew stronger following further expectations of stronger economic data.

The yen was also supported by concerns over the pace of US interest rate hikes, which has hit rough waters in the light of recent US economic data, as many analysts have scaled back from initial expectations of aggressive Fed rate hikes.

As the week unfolded, the yen remained firm against the greenback, after receiving support from Japanese trade data that showed a solid rise in exports and a hefty trade surplus - in line with market expectations. The data showed a 35.5 pct rise in the Japanese trade surplus for May, just off economists' expectations of a 37.8 pct increase.

Meanwhile, a spree of bomb blasts in Iraq and Turkey and a flurry of positive economic data in Japan fuelled a rare rally in the Japanese yen, as it pushed through tough resistance at 108 yen per dollar to touch a 10-week high of 107.02 per dollar.

With investors re-adjusting positions due to socio-economic and geo-political concerns, the yen remains on course for further gains through out next week - likely to be supported mainly by strong economic data.

Japan releases its retail sales, unemployment and industrial production numbers for May during the coming week, but the main focus is likely to fall on the release of the 'Tankan' business sentiment survey, which is likely to show an improvement in the overall health of the economy.

Range for the week: 106.40 - 109.40

Sterling

Sterling kicked off the week on a sombre note as lack of major economic indicators kept major players away, with many preferring to wait until next week's Fed policy meeting.

The main event on the UK economic calendar for the week proved to be the release of the Bank of England's MPC meeting minutes, which many analysts believed would support Sterling and reconfirm expectations of higher UK rates.

Meanwhile, tentative data showing Britain's housing market cooling down gave rise to pessimism, while some analysts reckoned that the pound may be vulnerable to a sell-off if the policy makers sounded less hawkish about prospects of higher interest rates.

The release of the BoE MPC showed that policy makers were unanimous on their decision to raise interest rates by 25bps, but there was little to suggest that more rate hikes would follow.

Sterling continued to soften after the minutes, with firm support around the $ 1.8100 level, and analysts saying that the currency is likely to come under further pressure if upcoming data failed to re-ignite speculation of higher UK rates.

Meanwhile, as the world watched a sad English soccer team saying good bye to their dreams of 'Euro 2004', Sterling regained some respectability following mixed US economic data and terror attacks in Iraq and Turkey, that kept the dollar under pressure allowing other major currencies to recoup earlier losses.

Market players and investors alike are likely to be treated to a feast of data in the week ahead, as the UK releases data on house prices, consumer confidence and manufacturing for June; and GDP and current account data for the first quarter.

Range for the week: $1.8100 - $1.8400