Greenspan hints on higher rates

Alan Greenspan's comments sent the greenback on a buying spree mainly due to optimism in rising interest rates in the United States, increasing the currencies attractiveness for investors. In the coming week, markets will be watching closely Germany's Ifo index and U.S. economic growth numbers. The European Commission's business and consumer confidence Surveys at the end of the week will also be scrutinised closely.

Euro

The dollar started the week in a range mode as many market players were waiting for Fed Chairman Alan Greenspan's semi-annual monetary report to the U.S. congress in the absence of any major U.S. data.

His views were eagerly awaited after recent economic indicators have signalled that the recovery of the world's largest economy had lost steam, prompting markets to scale back expectations of future interest rates rises and sell the dollar.

Furthermore, many were waiting to see if the 'measured' stance held by the Federal Reserve on future interest rate hikes would change. The greenback rose broadly after Greenspan's address, in which he surprised markets by his hawkish comments. He stated that U.S. economic growth was solid, reinforcing expectations of a steady rise in interest rates.

In his report to the Senate Banking Committee he further stated that the U.S. economic expansion had 'become more broad-based' and had 'produced notable gains in employment.'

Prior to his address, the euro had risen briefly after Germany's key ZEW survey suggested investor optimism in Germany was improving. The ZEW investor expectation index came in stronger than expected at 48.4, up from 47.4 in June. Analysts had forecast a dip to 47.0

The European single currency further lost ground against the rising dollar after another round of upbeat comments on the U.S. economy from Alan Greenspan. In his appearance before the House Financial Services Committee he gave a clean bill of health to the U.S. economy, saying that an above-trend pace of growth was sustainable both this year and next, with no apparent threat to price stability.

He further stated that markets seemed to be well prepared for possible Fed tightening in the future. Higher U.S. interest rates are seen as a positive for the U.S. currency as they would draw more foreign investors to U.S. assets.

Further compounding euro's loss was a report by United Press International; saying Iraqi security discovered missiles carrying nuclear warheads in Iraq. However, the euro recovered from that news after Iraqi Interior Ministry said the report was 'stupid.'

The dollar remained flat against the euro after mixed U.S. economic data. U.S. jobless claims fell 339,000 for the week ending July 17 compared with a revised 350,000 the previous week. The consensus forecast was claims of 345,000. However, the Conference Board's index of leading indicators fell 0.2 percent in June to 116.2, after a downwardly revised 0.4 percent gain in May.

Chicago Federal Reserve Bank President Michael Moskow reinforced the message of interest rate increases in a speech stating the Fed can probably raise interest rates at a measured pace. Should the economy overheat, the Fed will move more aggressively, he added.

The dollar showed only muted reaction to his comments. The U.S. dollar ended the week on a one-month high against the euro as markets adjusted their short dollar positions ahead of the weekend. Furthermore, positive vibes from Greenspan's comments started to really grip the markets.

Next week Germany Ifo index is expected to rise to 95.0 in July from 94.6 in June. The European Commission's business and consumer confidence survey is expected to have risen to 100.0 in July from 99.8 in June. The U.S. second estimate of second quarter gross domestic product (GDP) will likely keep investors on their toes with a Reuters poll forecast for growth of 3.8 percent, compared with 3.9 percent in the first estimate for the data.

In other U.S. data which has the potential to move markets is the July consumer confidence survey due for release on Tuesday. The data is expected to show a slight increase June.

Range for the week: $1.1950 - $1.2250

Japanese Yen

The Japanese yen slipped against the dollar, at the onset of the week, mainly due to a fall in Japanese share prices.

However, the yen fared a bit better than other major currencies after Greenspan's initial comments. It further found support from a 1.4- percent rise in Japan's Nikkei share average and a report in the Nihon Keizai newspaper that Japan would upgrade its economic growth forecasts for this fiscal year to 3.5 percent.

That would nearly double the government's projection made last year, and would bring it in line with bullish forecasts by private sector economists. The yen couldn't sustain its footing and lost ground after Greenspan's second outing to the congress. The U.S. currency rose to a one-week high against the Japanese currency moving above the 110.00 level.

But Tokyo traders were cautious about chasing the currency back above 110 yen, where heavy sell offers from Japanese exporters were seen lined up. The currency markets also paid little attention to a slightly lower-than-expected Japanese trade surplus in June.

The trade surplus rose 36.9 percent from a year earlier to 1.1470 trillion yen ($10.44 billion), below the forecast of 1.2933 trillion yen in a Reuters poll.

Meanwhile, Finance Ministry data showed that foreigners were net investors in Japanese stocks in the week ended July 16, snapping up 161.9 billion yen ($1.48 billion), while Japanese investors sold 163.2 billion yen in foreign bonds.

The Japanese currency also could not find solace in slightly weaker-than-expected Japanese economic indicators. The tertiary sector activity index, which gauges conditions in the services sector, fell 1.0 percent in May from the previous month while the all-industries index, a broader measure of economic activity and seen as a proxy for gross domestic product data, fell 0.7 percent.

The figures fell short of economists' forecast for a rise of 0.1 percent, causing the dollar to end the week above the 110.00 yen level.

Range for the week: 108.50 - 111.50

Sterling

Sterling started the week on a strong note having tested a 4-1/2 month high against the U.S. dollar, mainly due to gains it gathered from weak U.S. data in the earlier week.

However, market players were not ready to push the greenback lower ahead of a key speech by U.S. central bank chief Alan Greenspan later in the week. Dragging sterling lower was weaker-than-expected house price data which investors feared could mean fewer UK interest rate hikes in the future.

The Royal Institute of Chartered Surveyors (RICS) said that in the three months to June house prices in Britain rose at their slowest pace in 10 months. However, other data releases showed mortgage lending still strong in June but traders appeared to shrug off the figures.

The British Bankers' Association said underlying mortgage lending rose in June by 6.5 billion pounds, a sharp pickup from 5.1 billion in May. That was the highest monthly figure since comparable records began in 1997. Separately, public finance data showed government spending pushed Britain's public borrowing up more than expected in June.

The Office for National Statistics said that the pubic sector net cash requirement (PSNCR) stood at 10.62 billion pounds in June, around half a billion pounds up on a year ago. Analysts had expected a PSNCR of 9.0 billion pounds.

Sterling continued its free fall against the U.S. dollar after an upbeat assessment of the U.S. economy from Alan Greenspan. Furthermore, Bank of England minutes showed the Monetary Policy Committee had voted 9-0 to leave interest rates steady at the early July meeting. Even positive UK retail sales data failed to lift the pound.

British retail sales surged in June at their strongest pace in six months and at almost three times the rate expected, as the Euro 2004 tournament boosted TV and sportswear purchases. The greenback's dominance across the board even overshadowed upbeat UK growth data.

UK second quarter growth data came in as analysts had forecast at a robust 0.9 percent on the quarter, disappointing last minute speculation of even stronger number. Second quarter growth outstripped first quarter growth of 0.7 percent and scored its highest year-on-year rate since the third quarter of 2000 at 3.7 percent.

Range for the week: $1.8150 - $1.8450