US dollar fails to hold gains

Euro

At the start of the week, the dollar was unable to extend its gains sparked by stronger than expected U.S. jobs data in a holiday-thinned trade market and ahead of the U.S. Federal Reserve Chairman Alan Greenspan's testimony to the House of Representatives Budget Committee.

Additionally, greenback weakened against the euro after German industry orders rose by three percent in July, three times more than the economists' forecast, led by a rise in demand for German goods from abroad.

As the week progressed, softer-than-expected remarks from Alan Greenspan weighed on the dollar against most major currencies. Greenspan said inflation and expectations of inflation have eased in recent months.

He also mentioned that the evidence indicates that the U.S. economy had climbed out of its recent lull and was picking up steam, but uncertainty concerning the outlook on energy prices tempered further optimism on growth. He also warned that the U.S. budget deficit is a worry in the long term.

Moreover, the U.S. Federal Reserve's Beige Book of regional economic conditions showed that the economy in many areas of the United States grew at a slower pace in late July and August as household spending softened.

Close to the weekend, the dollar posted mild gains after U.S. jobless claims report suggested stable job creation and on news of narrower-than-expected U.S. trade deficit. Initial claims for state unemployment benefits fell 44,000 to 319,000 in the week to Sept.4, compared with the previous week's revised 363,000.

Meanwhile, the U.S. deficit narrowed to $50.15 billion in July, but still was the second-widest ever, with market's forecast of $51.75 billion gap. However, the U.S. currency pared its early rallies after U.S. producer prices tumbled 0.1 pct from a 0.1 increase in July. Weak U.S. economic data and Greenspan comments on the U.S. inflation cast doubt on the pace of interest rates hikes after September.

The United States will offer the lion's share of influential data next week, with retail sales, consumer inflation and manufacturing surveys due to release. Meanwhile in Europe, market's main focus will be on Germany's ZEW survey.

Range for the week: $1.2100 - $1.2400.

Japanese Yen

The Japanese yen began the week on a firm note as rising share prices and glowing capital spending figures boosted optimism about the outlook for Japan's economy.

The Japanese companies increased spending on plant and equipment by 10.7 pct in the April-June quarter. Later in the week, the yen got a further support against the struggling dollar, after the U.S. Federal Reserve Chairman Alan Greenspan painted a softer picture for the world's largest economy than many had anticipated, citing a rising budget deficit and low inflation.

Meanwhile, the yen hardly reacted to the Bank of Japan's decision to keep its monetary policy unchanged. As the week advanced, the yen weakened against the dollar and the euro on a surprising downward revision to Japanese growth data and much worse-than-expected machinery orders.

Japan's economy grew by 0.3 pct in April-June from the previous quarter, down from an initial estimate of 0.4 pct growth and defying economist forecasts for an upward revision. Meanwhile, Japan's core private-sector machinery orders data, a key gauge of trends in capital spending, fell 11.3 pct in July with market's forecast for a 2.5 pct drop.

Range for the week: 108.00 - 111.00

Sterling

Sterling traded close to its lowest levels in over three months versus the dollar at the beginning of the week as recent mixed data kept markets pessimistic about the prospect of another UK interest rates hike in the coming months.

A Confederation of British Industry (CBI) report showing optimism among executives in Britain's services sector soured in early August, did nothing to support expectations of interest rates rise.

In addition, unexpected fall in the U.K. factory output fuelled speculations that British interest rates are close to their peak. U.K. data reported manufacturing output dropped 0.2 pct in July from the previous month, compared with a forecast for a rise of 0.5 pct.

As the week progressed, the sterling was further pressured after a disappointing UK trade data. Britain's trade gap with the rest of the world widened in July to its biggest level since January as oil imports surged to a record high.
The balance on oil recorded a deficit of 61 million pounds in July, the first shortfall since August 1991.

Meanwhile, the pound was little moved by the Bank of England's widely expected decision to hold interest rates unchanged at 4.75 pct. Next week, market will keep a close eye on the UK job data and retail sales, for clues on the outlook of the British economy.

Range for the week: $1.7850 - 1.8150