Negatives pile up for the US dollar

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. Meanwhile, the Japanese yen got a brief boost on media reports that Mitsubishi Tokyo Financial Group (MTFG), Japan's third-largest bank, and fourth-ranked UFJ Holdings would join forces.

Foreign investors saw consolidation in Japan's banking sector as a sign of progress for structural reforms. However, the yen was unable to hold its gains as many domestic investors cast doubts about whether or not such a huge merger can be pulled off successfully.

Furthermore, worries over the outlook for the technology sector weighed on Japan's stock market and its currency. Yen came under additional pressure after Japanese consumer confidence stumbled in June, as consumers grew more pessimistic over the outlook for wages and employment conditions.

The data contrasted with recent economic releases, which have backed up expectations that Japan is nudging its way out of over five years of deflation. However the yen managed to regain its losses towards the end of the week after weaker than expected economic figures dented the outlook for U.S economic growth and added broad pressure on the dollar.

Range for the week: 106.80 - 109.80

Sterling

Sterling started the week on a firm tone against the dollar remaining unscathed even after data showing a sharp fall in UK producer prices.

The cost of raw materials in Britain fell at their sharpest rate in nearly two years in June, mainly as the price of crude oil tumbled. Meanwhile, there were mixed housing market data in Britain.

Data from the Office of Deputy Prime Minister showed British house prices rose at an annual rate of 12.2 percent in May. However, surveys published by two property web sites showed the UK housing market cooled in June with higher interest rates helping push down asking prices for new homes and hitting house hunter confidence.

Data showing Britain's consumer price index rising to 1.6 percent in June from 1.5 percent in May reinforced the market's belief that the Bank of England would raise rates again next month. As the week progressed, sterling came under pressure following the release of mixed UK labour market data and politically sensitive report into Britain's handling of intelligence on Iraq.

Average earnings in Britain rose less than expected in the three months to May; but the number of Britons out of work and claiming benefits also fell, indicating the labour market remains robust.

Furthermore, an inquiry by former top civil servant Lord Butler found 'serious flaws' in Britain's pre-war intelligence on Iraqi weapons but declared Prime Minister Tony Blair was not personally responsible.

Sterling finished the week touching $1.8753, its highest level against the dollar in nearly five months as figures showing a decline in foreign appetite for U.S. assets knocked the dollar across the board.

Financial Markets will focus into minutes of the Bank of England latest policy meeting which will be published next Wednesday and are expected to reinforce the case for another quarter-point rate hike next month.

Range for the week: $1.8600 - $1.8900