Greenspan hints on higher rates (page 1 of 3)

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.