Negative momentum for the dollar

his week the foreign exchange market will focus on a very heavy US economic data calendar, featuring reports on jobless claims, the trade balance, net capital inflows, producer prices and consumer prices. Other reports on retail sales, industrial production and consumer sentiment will also command attention.

Euro

The week started with Euro on the front foot against a weak greenback. Strategists said in the absence of concrete news, the dollar's weakness was in essence an extension of the move that began in the previous week after US payrolls sharply undershot market expectations.

The data supported expectations that the Federal Reserve would increase interest rates at a 'measured' pace as they said couple of weeks ago after raising interest rates by 25 basis points from a 46-yar low of 1 percent.

Those data, on top of some other disappointing numbers, led investors to scale back some of their US rates rise expectations. With the focus on paring back expectations for the US economy, the euro was not alone in its gains against the struggling greenback.

First dent on the US dollar came from a weaker-than-expected reading in June's ISM non-manufacturing index, which fell to 59.9 from 65.2 in May. Richmond Federal Reserve President Alfred Broaddus stated that recent rise in core US inflation has been a surprise but do not signal prices spiralling out of control.

Elsewhere in Europe, a survey showed the euro zone's dominant service sector grew at a slightly lower pace in June as demand growth eased in Germany and high oil prices continued to squeeze profit margins. The areas business activity index slipped to a lower than expected 55.3 in June compared to 55.8 in May.

However, euro benefited from expectations for monetary tightening in euro zone and concerns about the impact of rising oil prices on the US economy. Mid-week, oil prices rose to the highest level in over a month as supply disruptions in Iraq and Nigeria added momentum to a rally.

As the week progressed, euro broke through some key resistance level and moved higher against the ailing greenback. A sharper-than-expected drop in US weekly jobless claims failed to alter the market's bearish sentiment on the greenback. Analyst said the strong headline jobless claims number was due to seasonal factors and therefore was insignificant.

Also adding pressure on the US unit was a number of US sales warnings and earning disappointments that fuelled concerns over the strength of the country's economy. Added to this, risk aversion followed comments from US government officials that Al Qaeda could be planning to disrupt the presidential elections in November, and before that, at the political convention later this month.

Range for the week: $ 1.2100 - $1.2500.

Japanese Yen

The week started with US dollar recovering some of its losses against the yen on the back of weaker Japanese stock prices. As expected by the financial market the greenback moved more of less sideways given the shortage of market moving events and data.

US dollar broke through 109 yen as Tokyo stocks dropped and jitters grew ahead of Japanese parliamentary election. Media polls showed public support for Japan's Prime Minister Koizumi has plunged to record lows.

Media survey forecast his party is in danger of missing its target in the upper house election, which would weaken him and might even prompt calls for his resignation. Koizumi's coalition cannot be ousted from power as a result of the election for parliament's upper house, as it holds a majority in the powerful lower chamber.

By the end of the week, US dollar lost its ground on the back of higher oil prices, another bout of uninspiring US economic data and security alert in US against possible Al Qaeda attack on American soil.

Range for the week: 107.00 - 111.00

Sterling

Sterling bounced back against the greenback as UK data reinforced the view that interest rates in Britain would rise more quickly than elsewhere.

British service sector growth slipped unexpectedly in June, but prices companies charged their customer rose at their fastest pace in more than three years.

Bank of England was widely expected to hold interest rates steady after its monthly policy meeting on Thursday but to tighten policy again in August. The bank has already raised rates four times since November 2003.

Other data showed that the British manufacturing output grew for the second month in a row in May, rising at its fastest annual rate since October 2003 at 2 percent. Industrial output rose by an above forecast 0.5 percent on the month and 1.3 percent on the year in May, this data cemented expectations of a further UK rate hike in August.

Midweek, sterling flew past the key technical level of $ 1.8500 before the BoE's meeting. As expected, the Bank of England held interest rates at 4.5 percent after a back to back rate rise in May and June.

Evidence has grown in the past month that Britain's economy is growing briskly but tentative signs have emerged that the housing market is finally starting to lose steam.

Britain's trade deficit with rest of the world widened slightly in May as robust economic growth increased demand for imported goods and outpaced a surge in car exports. Britain's global trade gap widened to 4.62 billion pounds in May from a revised 4.59 billion in April.

By the end of the week, sterling traded near three-month high against a weaker dollar as investors awaited a raft of upcoming data for clues on the further path of British interest rates. Inflation, labour market and house price numbers are all due for release this week, together with minutes of the Bank of England latest policy meeting in June.

Range for the week: $1.8300 - $1.8800