Oil prices fail to dent US dollar

Optimistic comments from Fed officials were largely forgotten as market players pondered on the sustainability of the pace of economic growth in the United States following the latest jobs report which brought into light concerns of a weakening labour market.

As the country heads in to the upcoming presidential elections, the dollar looks poised for further losses largely due to the inconsistent economic numbers and a rise in oil prices fuelled by concerns over supply due to the ongoing crises in major oil producing countries including Iraq, Nigeria and Russia.

Euro

The euro remained steady for most part of last week, after coming under early pressure as markets turned its attention to optimism about the US economy after the G7 statement released at the end of a weekend meeting offered no surprises.

A flurry of speeches by Fed officials also came into the limelight as markets slated themselves for the biggest event of the week - the release of US non-farm payrolls at the end of the week.

Whilst analysts remained divided about the outcome of the labour market number, comments from Fed officials helped the dollar hold its footing against pressure from other major currencies.

Oil prices, which soared towards $ 53 a barrel, failed to dent the dollar as reports and comments indicated that the US economy was absorbing the costs of higher energy in a decent manner.

Comments from the Chief of the Federal Reserve branch in St. Louis - William Poole, who stated that the neutral Fed funds rate probably lies between 3 to 5 pct, also helped the dollar keep it's head above the surface.

Neutral rates are ones which neither spur, nor have a drag on economic growth. The US economy's resilience to higher energy prices were also reiterated by comments from Fed Reserve Bank of Kansas president Thomas Hoenig, who said that current oil prices would only have a modest impact on US economic growth.

Meanwhile, Fed Governor Ben Bernake who stated that the Central Bank might consider a pause if the economy slows down triggered a slight reversal in the dollar's fortunes, although the currency remained largely range bound in anticipation of the US payrolls data.

The decision by the European Central Bank to leave interest rates unchanged at its policy meeting failed to gain the market's attention as the currency traded in tight ranges ahead of key US data.

As the week drew to a close, the US labour department reported that 96,000 jobs were added to the economy in September, against median forecasts of a rise of 148,000.

Additionally, the number of jobs added to the economy in August was also revised lower to 85,000 from the earlier 144,000. The data triggered a massive sell-off in the greenback as investors - disheartened by the weak US jobs number hammered the currency lower.

The euro surged above $ 1.2400 levels in the aftermath and looks poised to break through the upper end of the recent range and trade with an upward bias in the coming week, as markets will remain on the lookout for more news on the state of the US economy.

Comments from Fed officials and the US Presidential candidates will be closely watched, whilst oil prices and the release of US retail sales data are also likely to provide direction to the currency markets in the week ahead.

Range for the week: $1.2260 - $1.2560

Japanese Yen

The Japanese yen kicked off on a weak note, as surging oil prices kept a cap on the currency's upward potential whilst adding immense pressure on the currency's downside barrier.

Whilst the 111 yen per dollar mark looked to be middle ground for the currency pair, record oil prices which hit $ 53 a barrel during the week proved to be a decisive factor in the Japanese currency's fortunes.

The pressure remained somewhat balanced as the greenback also found the going tough as it was pegged down by a weak US non-manufacturing ISM index, which recorded a lower-than-expected reading of 56.7 in September against an August
reading of 58.2.

However, the much-awaited release of the US jobs report, which came in lower than expected, had the last laugh on the currency pair, as the yen sprinted to a high of 109.33 per dollar, ending the day by recording its biggest one day gain in over an year.

The currency was also helped by speculation that China - seen as Japan's biggest economic rival - may soon allow its currency to appreciate against the dollar. The move was triggered after news emerged that US President George Bush had spoken to his Chinese counterpart about currency issues giving rise to talk that an upward revaluation of the Chinese yuan may be imminent.

The Bank of Japan meets next week, but no change in policy is expected, whilst the currency looks poised to make further gains subject to stable energy prices.

Range for the week: 107.60 - 110.60

Sterling

Sterling fell almost one percent at the start of the week as a rally in US stocks coupled with renewed optimism about the US economy lifted the greenback across the board.

The pressure mounted on the pound as markets continued to speculate on whether British interest rates were near their peak. Recent weakness in the British economy has reduced expectations of further rate hikes in the UK, with analysts forecasting only a 50-pct probability of another hike in November.

As the week progressed, the release of the CIPS/Reuters business activity index, which fell to 54.7 in September from 56.9 in August pushed the pound lower to a three-week low as the data added to the recent spate of soft data seen out of the UK.

The pressure continued as a report showed that manufacturing and industrial output also fell for the third month in a row in August backing a growing market view that the Bank of England may be near the top of their interest raising phase.

Meanwhile, the BoE's Monetary Policy Committee had no surprises in store and left interest rates unchanged with markets taking the decision in their stride.

However, the weekend release of weak US data helped Sterling regain some lost ground although the recent spate of soft British data has reinforced expectations that the Bank of England may be close to the end of their tightening cycle.

The release of British producer price data and consumer inflation data for September next week, together with trade data for August will provide further clues on the direction of UK rates.

Range for the week: $ 1.7860- 1.8160