Soaring oil prices will start to affect economic activity

The capital inflows data helped to ease market concerns about the United States' ability to attract enough foreign capital to fund its growing trade deficit.

Euro
At the beginning of the week, the dollar posted modest gains against the euro after a report on flows into U.S. assets showed a rise in foreign investments to offset the current account gap, which widened to a record 55.8 billion in June.

The U.S. Treasury said net capital inflows totalled $71.8 billion in June, up from an upwardly revised net inflow of $65.2 billion in May. The greenback also got a slight boost after a slew of U.S. economic data failed to substantially alter the outlook for Federal Reserve interest rate hikes. U.S. consumer price index (CPI) fell 0.1 in July, the first decline since November, with the market's expectation for a rise of 0.1 pct.

However, the dollar rallied after the U.S. July housing starts rebounded to a seasonally adjusted annual rate of 1.978 million with market's forecast of 1.900 million, and U.S. Industrial Production increased by 0.4 in July. On the other side of the Atlantic, a survey by Germany's ZEW institute showed investors confidence in Europe's biggest economy fell to its lowest level in 13 months in August as rising oil prices dampened recovery hopes.

As the week advanced, the dollar failed to hold its gains as more violence in Iraq and another record high for oil prices, which hit $49 per barrel. Weak U.S. data, such as Philadelphia Federal Reserve Survey that indicated the regional manufacturing index fell to 28.5 in August from 36.1 in July, also weighed on the greenback. Additionally, U.S. leading indicators tumbled to 0.3 pct in July with market's expectation for a decline of 0.2 pct. Meanwhile, initial U.S. weekly jobless clams dipped to 331,000 for the latest week, below forecasts of 335,000, failed to provide support to the dollar.

Next week, Financial markets will focus on U.S. Federal Reserve chairman Alan Greenspan speech, for clues on how quickly U.S. interest rates will rise as soaring oil prices start to affect economic activity. In economic data front, market will keep a close eye on U.S. Durable goods data for July, second-quarter U.S. GDP and August Michigan consumer sentiment. Meanwhile In Europe, Germany's Ifo business climate indicators will be closely watched.

Range for the week: $1.2200 - $1.2500.

Japanese Yen
At the start of the week, the yen found support after oil prices slipped from record high to $45.93 a barrel, on news that Venezuelan President Hugo Chavez survived a recall referendum, which eased the threat of disruption to the country's crude exports. Among the Group of Seven major industrialised nations, Japan is most vulnerable to rising crude prices as it imports all its oil and its export-dependent economy is highly sensitive to rising energy costs, while Venezuela is the world fifth-largest exporter.

The yen's rally was also aided after Japan's diffusion index of leading economic indicators for June was revised up to 63.6 from a preliminary 60.0. However, the yen's rise was muted on doubts about the strength of Japan's economic recovery, due in part to the previous week's surprisingly weak data for GDP in April-June.

Close to the weekend, the yen continued to move higher and hit a fresh four-week high of 108.95 against the dollar after Japan's tertiary sector index of services industry activity rose 0.8 pct month-to-month in June, above economists' forecast for an increase of 0.5 pct.

Range for the week: 107.50 - 110.50

Sterling
The sterling slipped against the dollar at the start of the week as a rebound in U.S. capital inflows data lifted the greenback, while the pound still subdued by dwindling British interest rates hike after a survey suggested that higher interest rates are cooling Britain's red-hot housing market. The Royal Institute of Chartered Surveyors said house prices in British rose at their slowest pace in a year in the three months to July as higher borrowing costs led to a drop in new buyer enquires. The Bank of England has raised rates five times by a total of 125 basis points to 4.75 pct since November last year, partly to cool house price inflation and consumer borrowing.

As the week progressed, the pound lost further ground as the minutes from the Bank of England raised expectations that British interest rates might be close to its peak. The minutes reported that the BoE's Monetary policy Committee voted unanimously to increase interest rates by a quarter-point, but also that no committee member urged a 50-point hike. This suggests that the tightening cycle may be drawing to an end.

Next week, market will keep a close eye on Confederation of British Industry's August trends survey, second-quarter GDP and GfK consumer confidence figures for evidence to the outlook of UK interest rates.

Range for the week: $1.8000 - 1.8300