Retreat in rising oil prices

Whereas, sterling was the hardest hit, mainly due to fears that the interest rates rising cycle in Britain could be drawing to a close.

Euro
The dollar started the week on a positive note mainly due to a fall in oil prices and upbeat comments on the U.S. economy from Federal Reserve officials. Comments from Dallas Fed President Robert McTeer and Federal Reserve Board Governor Ben Bernanke increased speculation that Fed Chief Alan Greenspan would reiterate his bullish view on the economy at a much-awaited speech at the end of the week. McTeer said that while the U.S. recovery was facing some challenges, the economic expansion was still intact. Whereas, Bernanke said that rising oil prices would weigh on the U.S. economic growth but the increases seen so far would not derail the expansion.

The U.S. currency remained range bound against the euro after mixed data for U.S. durable goods orders and weaker-than-expected new home sales didn't provide many clues on the U.S. economic outlook. Orders for durable goods, products designed to last at least three years, such as cars and refrigerators, rose 1.7 percent in July compared with economists' expectations of a 1.0 percent rise and June's upwardly revised 1.1 percent increase.

Non-defence capital expenditure excluding aircraft rose 0.6 percent. But excluding all transport, orders were only 0.1 percent up from the previous month. New homes sales fell 6.4 percent last month to a seasonally adjusted annual rate of 1.134 million units, the slowest pace since December.

The U.S. currency had little impact from the latest U.S. jobless claims data. Claims rose last week by a bigger-than-expected 10,000 in part due to effect of Hurricane Charley, which ripped through parts of western Florida. The euro was holding close to its lowest level against the U.S. dollar as weakness in Germany's Ifo business climate survey gave investors no reason to be exited about European growth. Ifo's main index fell to 95.3, instead of the 95.1 consensus forecast, especially as the institute's president said a recovery was still not on solid ground.

The dollar ended the week strongly against the euro, helped by U.S. economic reports that matched or beat expectations. U.S. gross domestic product grew at 2.8 percent annual rate in the second quarter, in line with economists' forecast, while the final University of Michigan consumer sentiment number for August came in at 95.9, lower than the preliminary reading of 96.7 but above economists forecasts of 94.0.

Next week markets will be focusing on U.S. jobs data as speculation increases as to whether the Federal Reserve will raise interest rates in September. Ahead of the Payrolls release, U.S. consumer confidence data on Tuesday and a manufacturing report on Wednesday will provide further clues on the health of the world's biggest economy. On the other side of the Atlantic the European Central Bank is expected to leave interest rates at a historic low of 2 percent at its meeting on Thursday.

Range for the week: $1.1900 - $1.2200.

Japanese Yen
The dollar gained against the Japanese currency at the onset of the week, buoyed by a retreat in oil prices and hopes that U.S. economic reports later in the week would provide some positive surprises. However, the yen soon recovered and rallied against the greenback on falling oil prices. Japan, which imports all of its oil, would be the most vulnerable to higher oil prices. Furthermore, selling bids by exporters lined up just above the 110 level were also seen as hindering the dollar's progress.

Markets were also assessing statements by U.S. Federal Reserve Chairman Alan Greenspan saying the Japanese economy seemed to 'finally be on its way to a self-sustaining recovery' but that it also faced risks. In a written response to question from lawmakers, Greenspan said that sustained high oil prices 'may exert a significant drag on the Japanese economic activity.'

The yen continued to be stable against the greenback as Japanese stocks continued to rally and after data showed a larger-than-expected trade surplus in Japan. Japan's trade surplus rose 44.2 percent in July from a year earlier to 1.1378 trillion yen ($10.33 billion), up for a 13th consecutive month and topping expectations for 882.4 billion yen.

The yen fell slightly following a surprise rise in June's unemployment rate. Japan's seasonally adjusted rate rose to 4.9 percent in July from 4.6 percent in June, higher than economists' forecast for 4.6 percent. Seperately, Japanese government data showed that the nation-wide core consumer price index, which excludes volatile fresh food prices, fell 0.2 percent in July from a year earlier. That figure compares with economists' median forecast of a 0.1 percent drop.

Range for the week: 108.00 - 111.00

Sterling
Sterling dropped against the dollar as investors eyed the prospects for British interest rates. Furthermore, the pound was also briefly hurt after London's international rail terminal at Waterloo was shut due to a security alert. Sterling continued its slide and fell to three-month lows of $1.7885 mainly due to heavy selling pressure since the minutes of the Bank of England Monetary Policy Committee's last meeting indicated that its rate-hiking cycle is drawing to
an end. Investors are scaling back expectations for aggressive rate hikes given recent data suggesting a slowdown in the domestic housing market.

The pound was little helped by an upbeat British manufacturing survey. The Confederation of British Industry said manufacturers were enjoying their best books in six years and planned to raise production despite high oil prices and rising interest rates. But the outlook for Britain's housing market looked less bullish as the British Bankers' Association said the number of new loans approved for house purchases fell more than 20 percent last month.

In the UK, the economy accelerated in the second quarter, driven by strong household spending, with overall growth unrevised in its second reading at 0.9 percent on the quarter. However, consumer confidence slipped in August to its lowest level since last December as a series of rate hikes from the Bank of England started to affect shoppers.

Range for the week: $1.7800 - 1.8100