US rates heading upwards

Euro

The dollar motored higher at the start of the week, recovering some of the losses it made after the Fed raised U.S. interest rates as expected, but did little to change the market's view that's its monetary tightening cycle will continue.

The policy-setting Federal Open Market Committee raised rates by a quarter percentage point to 1.75 percent, its third such move since the benchmark was raised from a 46-year low of 1.00 percent in June. The central bank said inflationary pressures had eased, giving some in the market reason to think initially the U.S. central bank may become reluctant to deliver further dollar-boosting rate increases.

However, as markets further scrutinised the statement, they saw a more positive economic outlook that could keep the Fed on track for another round of monetary policy tightening this year.

A Reuters survey taken in New York after the Fed decision showed all 22 economists polled expected another rate rise at the Fed's next policy meeting, on November 10, just after the presidential election.

Federal Reserve's optimism about the U.S. economy helped the dollar recover from losses sustained earlier due partly to rising oil prices. The dollar was buoyed by the release of minutes of the U.S. central bank's August 10 meeting showing that the monetary policy setting Federal Open Market Committee believed softness in the U.S. economic data would be 'short-lived'.

The FOMC also reckoned the economy was poised to resume a stronger rate of expansion and that 'significant cumulative policy tightening likely would be needed'. The dollar traded steadily despite news the U.S. jobless claims rose to 350,000 in the week September18 from 336,000 a week earlier. Economists had predicted 340,000 claims.

The greenback ended the week flat against the euro in volatile trading after falling to a one-month low, as markets focused on the underlying strength of U.S. durable goods orders.

The dollar initially slid versus the euro after August durable goods data came in below market expectations, but it rallied from intra-session lows of $1.2261 to $1.2363, the highest level since August 20 this year, after markets viewed the report as positive, especially with upward revisions to the previous two months numbers.

The Commerce Department said orders for durable goods fell 0.5 percent in August, below market forecasts for flat growth. However once the volatile transportation component was stripped out, orders were up a solid 2.3 percent, well above the 1- percent gain economists had expected.

In the coming week, market focus will be on the release of the German Ifo survey and U.S. manufacturing and price data.

Range for the week: $1.2100 - $1.2400

Japanese Yen

The dollar rose to a five-week high against the yen as rising oil prices hurt Asian currencies and as the market decided that U.S. interest rates were still on a rising path.

Adding to the pressure on the yen, oil prices leapt above $48 a barrel, peaking at a high of $48.65. Japan imports all of its oil needs, and Asia overall is heavily dependant on imported energy.

High prices raise worries about growth slowing and inflation rising, and tend to put Asian currencies on the defensive. However markets may support the yen and other Asian currencies going into the meeting of the Group of Seven leading industrial nations on October 1.

China will attend the meeting. U.S. Treasury Under Secretary John Taylor said China's policy of managing the yuan in a narrow band near 8.28 per dollar would be discussed at the G7 meeting. However, the Japanese currency drew some support from repatriation-related buying ahead of the half fiscal year-end this month.

Range for the week: 108.30 - 111.30

Sterling

Sterling swerved off the lows tested earlier against the euro and the dollar as more evidence emerged that higher interest rates are cooling Britain's once-booming property market.

Data from the British Bankers' Association showed mortgage lending rose at its weakest monthly pace in two years in August, while separate figures showed a fall in loan approvals for house purchases.

On the last trading session, sterling gained ground against the dollar after weak U.S. data cast doubt on the pace of future U.S. interest rate rises. News of an unexpected drop in U.S. durable goods orders in August triggered a one-cent rally in the pound to $1.8085.

In the coming week, Mortgage lending data for August is due on Monday and Britain's Finance Minister Gordon Brown will address a conference of the ruling Labour Party later that day.

Range for the week: $1.7850- 1.8150