US payroll numbers rock dollar

Euro

The dollar shuffled in well-worn ranges at the start of the week, keeping some distance of last week's lows against the single currency, ahead of series of heavy-weight events later in the week, such as U.S. Federal Reserve meeting and U.S. payrolls report, for clues on the EUR/USD direction.

Moreover, growing violence in Iraq ahead of the handover of sovereignty to an interim Iraqi government on June 30 continued to weigh on the U.S. unit.

As the week advanced, the dollar trimmed some of its losses and surged against the major currencies after U.S. consumer confidence index hit a two-year high of 101.9 in June, from 93.1 in May and surpassing market expectations of a rise to 95.0.

Later in the week, the U.S. central bank's Federal Open Market Committee (FOMC) meeting, as expected, raised its interest rates by a quarter point for the first time in four years from its 46-year low to 1.25 pct. The FOMC also offered few surprises in its statement, reiterating it would follow a "measured" pace on interest rate increases to tame inflation.

In addition, a string of U.S. economic data released during the week reinforced the market's view that the Federal Reserve can continue to hike interest rates at a more measured pace. The greenback fell sharply after the Fed's decision and on the weak U.S. figures.

The Labour Department said the economy created 112,000 jobs in June, below market forecasts for a 250,000 increase. May's payrolls were also revised down to 235,000 from 248,000, while the jobless rates remained steady in June at 5.6 pct. Moreover, the Commerce Department reported factory orders dipped 0.3 pct in May from a revised of 1.1 pct in April. The median forecast was for a 0.6 pct drop.

Meanwhile, the core personal consumption expenditure index, a key inflation gauge, rose 0.2 pct in May, the same as in April. On the other side of the Atlantic, the European Central Bank (ECB) kept its interest rates unchanged at 2.0 pct. However, economists polled by Reuters mentioned that the ECB is likely to leave its rates unchanged this year, and may start raising in the first six months of 2005.

Global markets are looking ahead to a fairly quiet week, with little U.S. data due for release and U.S. market closed on Monday for Independence Day. However, market's focus will be on the U.S. non-manufacturing Institute of Supply Management (ISM) data, for further clues to inflationary pressures. In Europe, German unemployment in June and Germany's May trade balance will be closely watched next week.

Range for the week: $ 1.2200 - $1.2500.

Japanese Yen

Weaker-than-expected Japanese industrial output data pushed the dollar higher against the yen at the beginning of the week. The Japanese output rose by 0.5 pct in May from the previous month, but was lower than market's forecast.

However, the yen's fall was limited on expectation that Japan's "tankan" report due for release later in the week will show strong reading and data showing Japan's jobless rate fell to 4.6 pct in May, its lowest level since August 2000, from 4.7 pct in April.

As the week progressed, the much anticipated Bank of Japan (BoJ) quarterly business sentiment survey 'tankan', which showed stronger-than-expected reading, sent the dollar below 108 yen levels.

The key figure in the BoJ's quarterly 'tankan' survey came in at plus 22, jumping from plus 12 in March to its highest mark since August 1991 and exceeding market forecasts for plus 17.

Range for the week: 106.50 - 109.50

Sterling

Sterling rallied against the flagging dollar at the start of the week, benefiting from broad losses in the U.S. currency in nervous trade ahead of a key U.S. policy meeting later in the week.

Midweek, the pound revered some of its early losses as signs emerged that recent UK interest rate rises were starting to hit British consumers and houses prices. A survey from the Nationwide building society showed monthly house price inflation slowed to 0.9 pct in June, while Bank of England (BoE) data indicated that growth in mortgage lending fell to a nine-month low in May.

Comments from Bank of England governor Mervyn King have also knocked expectations for higher interest rates in UK. King stated in parliamentary testimony that interest rates in Britain would not have to rise as sharply as they might in other countries.

He also warned several times in recent weeks about inflation UK house prices. Moreover, UK data continued to take the shine off the pound's gains after Purchasing Mangers' Index (PMI) fell to a lower than expected 54.8 in June from May's 55.7. On the last trading day, the sterling jumped above 1.8300 levels against the dollar on the disappointing U.S. economic data.

Week ahead, main market focus will be on the Bank of England's (BoE) monthly rate-setting meeting, with expectations that BoE will keep the rates unchanged at 4.5 pct.

Range for the week: $1.8200 - $1.8500