Concerns over the health of the US economy (page 1 of 2)

Comments by US and European officials kept the dollar supported but the Japanese yen broke away from the pack as it tested a fresh five-year high of 101.80 per dollar due to calls from Europe for flexible Asian currency policies.

The dollar is likely to be supported by expectations of higher US interest rates, but the release of US inflation and capital inflows data in the week ahead could have a detrimental impact on the fortunes of the greenback.


Euro
The euro got off to a cautious start after coming under pressure in the previous week following strong comments from US Treasury Secretary John Snow, who reminded markets that the US remained committed to a strong currency policy. Expectations of rate hikes in the United States continued to support the dollar as markets braced themselves for the release of the all-important US trade deficit for November - seen as crucial to the future of the world's largest economy. As the week progressed, the euro managed to recover some lost ground as the lack of fresh bids to buy dollars faded due to unfavourable expectations on the US trade gap. An improved reading on the German ZEW research institute's Expectations index, which rose to 26.9 in January from 14.1 in December, against expectations of a rise to 17.0, also supported the euro higher.

The euro remained steady but made consistent forays towards the upper end of the range as market players looked ahead to the key US deficit - forecasted to show an improved $ 54.0 Billion in November.

The release of the much-anticipated data brought forth more problems for the greenback as the deficit climbed to a new record $ 60.3 Billion, and indicated that exports had slowed down in contrast to a sharp pick up in imports. The data triggered a moderate sell-off, as the dollar was caught in a tidal wave of its own whilst the euro sprinted higher towards $ 1.3300 levels.

As markets pondered on the United States' ability to bridge the gaping deficits, comments from Fed officials indicating higher US interest rates kept a check on the euro's gains. Comments by ECB's chief economist Otmar Issing who called on Asia to absorb more of the dollar's weakness also helped the dollar, as markets kept their appetite for euros at a minimum. As the week progressed, the release of healthy US retail sales data for December, which recorded a gain of 1.2 pct helped the dollar regain its footing although traders remained cautious in taking it to a new high for the year. The European Central Bank kept interest rates unchanged at 2.0 pct as expected, whilst market reaction was muted as traders largely ignored the decision.

Comments by US St. Louis Fed President William Poole who hinted that US rates may appreciate faster than predictions also supported the dollar, whilst confirmation of the country's long standing strong dollar policy from President George W. Bush himself also added fuel to the dollar. The comments coupled with healthy US economic data showing a rise in producer prices for December and a pick up in industrial production helped the dollar end the week unchanged.

The release of US inflation data for December and capital flows data for November will hog the limelight next week, with the dollar's fortunes largely dependent on the latter; as markets seek further insight to the future of the US economy and it's growth in the midst of a widening deficit problem.

Last week's Range: $ 1.3053 - $ 1.3292
Against AED: 4.7944 - 4.8822

Range for this week: $ 1.3000 - $ 1.3300
Against AED: 4.7749 - 4.8851



Japanese Yen
The yen put on an aggressive display at the start of the week, as it remained resilient in the face of the dollar's new-year rally ignited by expectations of higher US interest rates.