An important week for the dollar

Euro

The dollar commenced the week slightly lower against the euro as markets weighed European comments urging Asian countries to let their currencies rise and share the burden of the dollar's weakness.

German Finance Minster Hans Eichel said he hoped Asia would do more to promote flexible exchange rates. That came on the heels of comments by the French Finance minister and the Bank of France chief suggesting that Europe has shouldered too much of recent currency adjustments and wants Group of Seven economic powers to address the dollar's weakness.

Policymakers from the G7 and key emerging economies including China meet in London on February 4-5. Midweek, the dollar rallied buoyed by a U.S. consumer confidence report that was stronger than expected and on news suggesting China would not revalue its currency soon.

The Conference Board said U.S. consumer confidence index in January was 103.4, beating economists' forecasts of 101.0. The data provided the dollar with the much-needed ammunition and also helped send U.S. stock prices and bond yields higher.

Apart from China, Iraq's upcoming elections on Sunday weighed on the dollar in the wake of news of U.S. causalities in a U.S. helicopter crash in Baghdad. The Iraq news fuelled a flight to safe-haven currencies such as Swiss franc, pushing the dollar down to 1.1840 francs.

Meanwhile the euro rose to $1.3070 levels after an upbeat survey on German business sentiment. German business morale rose to its highest level in 11 months in January as firms' expectations brightened on signs of stronger domestic demand, the Ifo institute said.

The dollar continued its decline against the euro pressured by below consensus U.S. growth data as markets grew wary ahead of a plethora of economic news and events in the coming week.

The U.S. economy grew at an annual pace of 3.1 percent in the fourth quarter last year, according to the Commerce departments advance estimate against expectations for a growth of 3.5 percent on the year.

Uncertainty ahead of the Group of Seven and key emerging nations meeting has kept major currencies locked in narrow ranges throughout the week. The Federal reserve which meets on 1-2 February is widely expected to raise U.S. interest rates by a quarter percentage point for the sixth consecutive time.

In addition, the Commerce department releases the January employment report for clues on the performance of the U.S. labour market. A Reuter's poll forecasts an increase to 180,000 from 157,000 in January.

Range for this week: $1.2900 - $1.3200

Japanese Yen

The greenback tumbled against the yen testing 102.35 levels after China reignited market talk of a yuan revaluation, saying it would discuss its pegged currency regime at the upcoming meeting of the G7 nations in London.

The yen is most sensitive to any news on China's position on the yuan since any revaluation would likely lift Asian currencies.

Speculation about a revaluation has been rife in the past year, with European officials urging Asian countries whose currencies are controlled to let those units rise to share the burden of the dollar's three-year decline.

Earlier on Friday, a senior official at the Bank of China, not to be confused with the official policy-setting People's Bank of China, said there was unlikely to be a yuan revaluation in the next 6 to 18 months.

The market initially sold yen on the remark, but mostly bought them back on realisation the remarks were not official.

Range for this week: 101.50 - 104.50

Sterling

Sterling traded on a positive note against the dollar after upbeat growth data and broadly neutral comments from the Bank of England made early interest rate cuts seems less likely.

Analysts said minutes from the BoE's Monetary Policy Committee's January meeting, when interest rates remained on hold, cemented expectations that borrowing costs will be steady for some time.

The BoE's five interest rate hike from November 2003 helped boost the pound on a tradeweighted basis in the first half of 2004, but the currency has since lost some ground amid worries that the British economy was losing steam.

The pound however soon lost steam slipping from multi-week highs against the dollar dented by data showing UK mortgage approvals at a five-year low. The British Bankers' Association said loan approvals for home purchase fell 38 percent in December on a year ago.

Sterling dropped more than a cent from earlier two-week highs of $1.8931 to below 1.8800 levels. For U.K, data next week includes service sector and manufacturing purchasing managers' surveys for January

Range for this week: $ 1.8700-$ 1.9000