No surprises from Greenspan

Euro

The euro started the week trading within tight ranges ahead of Alan Greenspan's twice-yearly testimony on monetary policy to Senate and House of Representatives later in the week.

Meanwhile, the single currency received some support from hawkish comments by European Central Bank members. ECB Vice President Lucas Papademos said that the risks to price stability had increased recently and the bank was ready to act if economic recovery added to these pressures.

As the week progressed, the dollar rallied against the euro after a report showed U.S. net capital inflows were roughly in line with expectations in December and the level of foreign investment was sufficient to finance the nation's trade deficit for that month.

Net inflows of capital into U.S. assets in the month of December slowed to $61.3 billion, from an upwardly revised $89.3 billion in November. However, the greenback trimmed its early gains on news that an aircraft had fired a missile near the southern city of Dailam in the province of Bushehr where Iran has a nuclear power plant.

Reports later confirmed that the blast was made by construction workers building a road at the site of a dam near Dailam. The Iran news overshadowed robust U.S. housing start number for January and a report that showed U.S. industrial production was flat in the same month, although manufacturing output remained healthy.

Close the weekend, the dollar was little changed against the euro as the Federal Reserve Chairman Alan Greenspan reiterated that U.S. interest rates remain 'fairly low', a signal for further increases in the rates, but offers no clues on their pace or timing.

Meanwhile, a report on U.S. producer prices (PPI) showed an unexpected jump in core inflation, suggesting more chances of higher interest rates. U.S. PPI rose by 0.3 pct in January compared with the previous month. However, the dollar hardly reacted to Philadelphia Federal Reserve's business activity index, which surged to a better-than-expected 23.9 in February.

Week ahead, market will keep a close eye on U.S. consumer prices index and Federal Reserve minutes for signs of more aggressive economic tightening, meanwhile, in Europe, market will watch German business sentiment represented by Ifo index.

Range for this week: $1.2900-$1.3200

Japanese Yen

At the beginning of the week, the yen surged against the dollar after a jump in Japan's current account surplus, highlighting persistent concerns about the imbalance between Asian trade surpluses and U.S. deficits.

Japan's current account surplus expanded 35.1 pct in December from a year earlier to 1.6160 trillion yen ($15.33 billion), much bigger than a forecast of a 4.5 pct increase.

As the week advanced, the yen lost ground against the dollar after data showed that Japan's economy was in recession for much of 2004. Japan's real gross domestic product shrank 0.1 pct in October-December.

Meanwhile, the market showed little reaction to the Bank of Japan's decision to keep monetary policy unchanged. The Japanese unit also remained under pressure on dimming expectations of a near-term revaluation of China's yuan, with a revaluation seen having a knock-on strengthening effect on other Asian currencies.

Range for this week: 104.00-107.00

Sterling

Sterling moved higher against the dollar at the start of the week after producer price data raised expectations that the Bank of England (BoE) may need to hike its interest rates again to curb inflationary pressure.

British raw material cost rose by a seasonally adjusted 3.4 pct in January, the sharpest pace in more than four years. Meanwhile, in its quarterly Inflation Report, BoE revised up its profile for consumer price inflation, but said the risks to both economic growth and inflation were to the downside.

In addition, British consumer price inflation held steady at an annualised 1.6 pct in January, in line with expectations but still below the Bank of England's 2 percent target. The Bank of England has raised its interest rates five times between November 2003 and August 2004 but has left the rates unchanged at 4.75 pct since then.

The pound also received a boost after UK retail sales rose 0.9 pct in January after a 1.1 pct monthly fall in December. However, sterling had a muted reaction to data showed underlying mortgage lending was up 4.4 billion pounds in January, a marked slowdown from a 5.1 billion pound rise in December.

Next week, market will watch the Bank of England's Monetary policy Committee report for clues on the outlook of the British interest rates.

Last week's Range: $1.8745-$1.8975