Disappointing trend in the path towards an economic recovery (page 1 of 2)

Euro
The greenback started the week, extending its heavy losses made against the euro after a previous week's far-weaker-than-expected U.S employment report cast doubt over the health of the economy and the pace at which the Federal Reserve would raise interest rates.

Federal Reserve Chairman Alan Greenspan said last month that weakness seen in June was likely to be a passing phenomenon, but the sell-off in equities and the dollar showed investors had become less convinced of this view.

The dollar rallied against the euro after the U.S Federal Reserve raised target-borrowing costs by 0.25 percent and reaffirmed its bullish view of the U.S. economy. The Fed's upbeat view on the economy came in the face of soaring oil prices and a recent batch of weaker than expected U.S. economic data. The Fed said that recent softness in U.S. output and employment data was likely due to a rise in energy prices, but added that the economy "nevertheless appears poised to resume a stronger pace of expansion going forward".

The dollar continued its gains after the number of Americans filing first claims for jobless pay dropped by 4,000 last week, a second straight weekly decline that appeared to reflect improving job prospects. The Labour Department reported that initial jobless claims dipped to 333,000 from 337,000 in the previous week, contrary to Wall Street economists' expectations that they would rise to 338,000.

The four-week moving average of claims also fell to 339,250 from 343,500 in the July 31 week. Furthermore, government report showed that U.S. shoppers returned to stores in July, however, the retail sales for the month posted a smaller than-expected- gain as consumers coped with the recent rises in energy prices.

The Commerce Department said retail sales rose 0.7 percent in July to a seasonally adjusted $336.50 billion, less than economists predicted but a rebound from the revised 0.5 decline in sales in June. The figures reflected a mixed picture of consumer spending, which accounts for about two-thirds of overall U.S. economic activity. With June sales revised up from the previously reported 1.1 percent decline, the "soft patch" in spending noted by Federal Reserve Chairman and others was not as deep as believed.

At the end of the week dollar was forced to give up its gains against the euro after data showed a record U.S. trade deficit in June cast fresh doubts on the economic recovery in the U.S. and its ability to draw foreign capital to fund the growing gap. Commerce department data showed that the deficit widened to a record $55.8 billion in June, defying expectations for a slight widening to $47.0 billion, as exports dropped and imports rose.

Furthermore, foreign investors sharply slowed the pace of their investment in the United States in May. Net capital inflows were $56.4 billion, down from $76.0 billion in April. Dollar also slipped in the wake of a report from the University of Michigan showing a decline in U.S. consumer sentiment. The preliminary reading of its August sentiment index was 94.0, compared with July's reading of 96.7. Forecasts had called for the August reading to reach 97.5. Other U.S. data showed U.S. producer prices rose less than expected in July.

The producer price index was up 0.1 percent, compared with a 0.3 percent decline in June. Excluding food and energy prices, the PPI rose 0.1 percent. The index had been expected to rise 0.2 percent with the core PPI forecast to be up 0.1 percent. Next week, financial markets would focus on U.S capital flow data for June due on Monday, in addition to U.S.