US trade deficit knocks the dollar

Euro

The dollar commenced the week on a positive note, rallying from recent jobs-related losses as it drew support from soft economic data. The dollar gained against the euro, drawing support from weaker-than-expected investor confidence numbers in the eurozone.

Germany's ZEW investor confidence index fell to 31.3, its lowest since June 2003, compared with a forecast of 36.5, due to concerns about a global growth slowdown and rising oil prices.

However, the dollar soon retreated following a report showing the U.S. trade deficit grew to the second-highest level on record in August, stoking doubts about U.S. economic growth. The U.S. trade gap in August rose to $54.04 billion, expanding nearly 7 percent from a revised estimate of $50.55 billion in July.

The rise in the trade gap was fuelled by the highest oil import prices in 23 years and record imports from China. Investors further sold the dollar after initial U.S. jobless claims climbed more than expected to 352,000 in the latest week ended Oct 9, from an upwardly revised 337,000 the prior week. The median forecast was for claims of 340,000.

The dollar's downfall continued as it crashed to nearly 8-month lows against the euro after a flurry of mostly disappointing U.S. economic reports cast doubts about the pace of future Federal Reserve interest rate hikes.

Weak consumer prices, softer-than-expected industrial output and a bearish New York State manufacturing survey all suggested the U.S. economy might be losing steam. Only much stronger-than-expected U.S. retail sales data provided fleeting support for the dollar, which swiftly vanished.

The euro climbed briefly breaking above the psychologically key $1.2500 level. U.S. industrial output for September inched up by a less-than-expected 0.1 percent.

The dollar was heavily sold after the University of Michigan consumer confidence index fell sharply than expected for October at 87.5, down from September's final reading of 94.2. Markets were expecting a reading of 94.0.

Meanwhile, U.S. retail sales rose by an unexpectedly large 1.5 percent in September, initially spurring some dollar purchases. The dollar recovered some of its losses after the Federal Reserve Chairman Alan Greenspan downplayed the impact of higher oil prices on the U.S. economy.

The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970's, Greenspan said.

Crude for November delivery traded on the New York Mercantile Exchange was at $54.50 a barrel after hitting a record high $55.00.

Range for the week: $1.2350-$1.2650

Japanese Yen

The dollar climbed against the yen at the onset of the week, as the Japanese currency reeled from the impact of soaring crude costs due to continued fears of supply disruption and higher global demand.

Japan which imports all of it oil, is viewed as the major economy most vulnerable to a spike in prices. The yen weakened to 110.10 per dollar after China's foreign exchange regulator said speculation the yuan would be allowed to strengthen soon was 'groundless'.

The State Administration of Foreign Exchange said China would not take the 'unwise move' of a one-off yuan revaluation.

However towards the later part of the week, the greenback dipped against the yen testing 108.80 yen after a batch of weak U.S. economic reports raised doubts about the pace of future U.S. interest rate hikes.

Range for the week: 108.50-111.50

Sterling

Sterling traded higher against the dollar testing a two-week high as dollar's renewed weakness stemmed from softer than expected economic data.

The pound has been under pressure in recent weeks as weak data and comments from Bank of England policy makers reinforced expectations that interest rates are at or near their peak.

In the coming week, a flurry of data is scheduled for publication on the British economy, which has started showing signs of slowdown.

On Wednesday, investors will look at the minutes of the Bank of England Monetary Policy Committee meeting, expecting a unanimous decision to hold rates unchanged at the start of October.

But the markets will scrutinise the report for any indication of whether the BoE was considering another hike since many analysts now forecast that Britain's central bank may have already finished the current tightening cycle.

British retail sales data for September due on Thursday is expected to show a rise of 5.85 percent on the year, compared with 6.5 percent the previous month.

Range for the week: $ 1.7900-1.8200