Greenspan helps the dollar higher

Euro

The European Single Currency started the week trading within tight ranges against the dollar ahead of the Federal Reserve monetary policy meeting and gathering of Group of Seven finance ministers and central bankers late in the week.

Moreover, EUR/USD ignored a mixed batch of US economic data released over the week. U.S. personal income in December rose by a record 3.7 pct, while the Chicago Purchasing Managers Index for January came in at 62.4, up from December's revised 61.9. Additionally, the Institute for Supply Management's index of manufacturing activity in January fell to 56.4 from 57.3 in December.

As was widely expected, the US Federal Open Market Committee announced its sixth consecutive quarter point increase and brought the benchmark federal funds rate up to 2.5 pct. Adding to that, the Fed kept its stance on monetary tightening at a 'measured' pace.

On the other side of the Atlantic, the European Central Bank left its interest rates unchanged at 2.00 pct. Meanwhile, data showed that inflation in the euro-zone fell more than expected to 2.1 pct in January, which reduced expectations of interest rate rise in the euro zone.

German unemployment rose in January to its highest recorded level since 1933 as government labour market reforms and seasonal effects added more than half a million people to the total. The news weighed on the single currency.

Meanwhile, US non-farm payrolls for January surged by 146,000, below the market's forecast of 190,000 increase. The previous three month' job gains were also revised lower, although the January unemployment rate fell to 5.2 pct from 5.4 pct.

On the last trading day, the euro lost ground heavily and tested almost three months level of $1.2865 after comments from the US Federal Reserve Chairman Alan Greenspan. The Fed Chairman said that market forces and tighter US fiscal policy should stabilise and may cut the US current account deficit.

Next week, the focus will be on the US Trade balance with expectations that deficit may narrow to $57 billion in December from $60.3 billion the previous month.

Range for this week: $1.2750-$1.3050

Japanese Yen

The greenback traded with a firm bias against the yen at the start of the week as markets refrained from taking major bets ahead of the Federal Reserve meeting and the gathering of the G7 finance ministers and central bankers.

The yen in the short term could come under mild pressure on receding expectations that China will soon move to relax the peg of its currency to the dollar, a move which could buoy Asian currencies.

The Japanese currency shot up to five-year high of 101.67 yen versus the dollar in mid-January on speculation that such a move was imminent. The G7 economic powers does not expect China to announce any change to it currency regime at talks in London over the weekend, and is not looking for an abrupt change in policy, a European G7 source said.

An official from Japan's Finance Ministry stated that China should move towards a flexible exchange regime soon, but the markets however ignored the comments. Meanwhile, the dollar continued to march higher, pulled by euro/yen buying related to Japanese investments in euro bonds.

The last trading day witnessed the dollar hold 104.00 levels as markets digested a slew of headlines and news from the two-day meeting of G7 finance ministers and central bankers which got underway on Friday.

Range for this week: 102.50-105.50

Sterling

Sterling held steady at the beginning of the week after mixed UK economic data failed to give it direction and ahead of key events in the United States.

The British consumer confidence index surged in January to its highest level in more than two years to +1 versus a forecast -3, the same as for December.

However, the Confederation of British Industry's distributive trades survey showed sales balance of -3, the weakest since September when it was -9 and well below the +21 that economists had expected. Moreover, the Purchasing Managers' Index (PMI) in UK tumbled to 51.8 in January from a revised 53.3 in December, and below a forecast of 53.7.

The pound fell sharply against the dollar on the last trading day after the Fed Chairman's remarks on the US current account deficit.

Week ahead, the focus will be on the Bank of England's Monetary Policy Committee decision with expectations interest rates will remain unchanged at 4.75 pct. String of British economic data, such as Industrial production and Trade figures, will also be closely watched.

Range for this week: $ 1.8600-$ 1.8900