The Fed is expected to raise interest rates again (page 1 of 2)

This outlook was reinforced by the release of minutes from the Fed's latest meeting, which showed U.S. central bankers believed rates were too low to forestall inflation. The Fed is expected to raise interest rates again as soon as the start of February, bringing them up to 2.5 percent.

Euro
The dollar started the week on a strong footing against the euro as trading in 2005 got off to a quite start in Asia. Holidays in Japan, Australia and New Zealand and London kept volumes low. The euro was sold as traders booked profits after pushing it to a lifetime peak at the end of 2004. However, the dollar struggled to extend its gains after data showed euro-zone factory growth improved slightly in December from a 14-month low and beat forecasts, while the Bank of Spain said in its monthly bulletin that the euro's rise was having only limited impact on exports.

The Bank of Spain comments added to others in the past month suggesting that European Central Bank officials were not too worried about the euro's more than 9 percent jump against the dollar since mid-October. Meanwhile, the Institute for supply management's U.S. manufacturing index, for December climbed slightly to 58.6 from 57.8 in November.

However, the gauge's employment component, favoured by many analysts as a predictor of U.S. jobs growth, slipped to a 14-month low of 52.7 in December from 57.6 in November, raising worries about a U.S. non-farm payrolls at the end of the week. Richmond Federal Reserve President Jeffery Lacker said that the slip in the employment portion of the ISM manufacturing index had caught his eye.

As the week progressed the dollar managed to extend its gains against the euro after minutes of a December Federal Reserve policy-setting meeting signalled the U.S. central bank remained on track to continue raising interest rates. Higher rates tend to make short-dated U.S. dollar-denominated deposits more attractive for foreign investors, adding to demand for the currency. Furthermore, the dollar got a boost from a larger than expected rise in U.S. factory orders.

The data showed value of new U.S. factory orders climbed 1.2 percent in November, surpassing market expectations for a 0.8 percent rise. Meanwhile, in Germany, data showed unemployment rose for the 11th consecutive month in December to 4.483 million, giving an unemployment rate of 10.8 percent in the euro zone's largest economy.

The prospect of higher U.S. interest rates, in addition to unwinding of dollar short positions were providing support for the dollar. Meanwhile, the financial markets shrugged off the institute for Supply Management's services sector index, which rose more than expected to 63.1 in December from 61.3 in November. However, the gauge's employment components edged lower to 54.9 from 55.0 in November.

On the last trading day dollar pushed higher against the euro in a technically driven rally that gained momentum after remarks by U.S. Treasury Secretary John Snow. He said the United States supports a strong dollar and wants to "do things" including cutting the budget deficit, to support the currency's strength.

He said "our policy is a strong dollar, we support the strong dollar, and strong dollar is in our national interest. We want to do things to sustain the strength of the dollar, among them is going to the Congress to work on the deficit, to bring the deficit down". His comments appeared to contrast with his earlier views that the United States supported a strong dollar but markets should set exchange rates.