Negatives pile up for the US dollar (page 1 of 2)

Euro

At the start of the week the greenback rose against the euro taking a breather after recent heavy losses and ahead of a slew of U.S. economic data and corporate results. Dollar's modest recovery was largely due to technical factors, with investors covering short positions made on the view that the U.S. Federal Reserve was in no rush to raise interest rates.

The dollar continued its gains, lifted by news of a narrower U.S. trade deficit in May than Wall Street had expected. As exports jumped in May, the trade gap narrowed to $45.95 billion, below the $48.3 billion economists' had forecast, from $48.10 billion in April. The trade gap has been a persistent weight on the dollar for some two years, as the U.S. appetite for foreign goods requires sales of dollars.

However, some analysts were sceptical about the dollars rally, saying it could be an isolated event, given a slew of reports due later in the week that could give further evidence of a slowdown in U.S. economic growth.

The dollar's rally proved to be short-lived after U.S. retail sales data showed consumer spending slowing. U.S. retail sales slid 1.1 percent in June, worse than economists' forecasts of a 0.6 percent fall. Excluding a large decline in auto sales, retail purchases fell 0.2 percent. Analysts said that the data would keep the Federal Reserve on a path of gradual interest-rate rises.

As the week was coming to an end the dollar fell sharply against the euro to a low of $1.2460 as a string of U.S. economic reports signalled slowing growth in the United States. U.S. Labour Department reported that first time claims for state unemployment benefits rose 40,000 to 349,000 in the week ending July 10.

Meanwhile, government data showed that U.S. producer prices shrank unexpectedly last month. Overall finished goods prices declined 0.3 percent versus a 0.8 percent rise in May, posting its largest decline since it fell 0.4 percent in May 2003.

The dollar came under additional pressure after core U.S. inflation in June, minus volatile food and energy prices, was more muted than expected. Meanwhile, net capital inflows into the United States came in disappointingly low, drawing attention to the wide U.S. current account deficit and adding downward pressure on the dollar.

Next week, financial markets would focus on Fed Chairman Alan Greenspan's testimony in Congress. Greenspan delivers his semi-annual report on monetary policy before the Senate Banking, Housing, and Urban Affairs committee on Tuesday and before the House Financial Services Committee on Wednesday.

Range for the week: $1.2300 - $1.2600

Japanese Yen

The Japanese yen kicked off the week on strong footing against the dollar as investors expected economic reforms to survive a poor election showing by Japan's ruling Liberal Democratic Party (LDP).

Japanese Prime Minister Junichiro Koizumi's LDP won 49 of 121 upper house seats at stake on Sunday, missing a modest target of 51 but avoiding the worst-case scenario of wining less than 44. Japan's ruling coalition had kept its majority in the upper house.

It also holds a majority in the more powerful lower chamber, which chooses the Prime Minister. Furthermore, yen found additional support after data showed that surplus in Japan's current account was up 23.8 percent in May from a year earlier, higher than the 11.9 percent rise forecast in a Reuters poll.

As the week progressed, the Bank of Japan policy board decided to keep its monetary easing policy unchanged, as widely expected by financial markets.