Dollar continues to fall

Euro

The dollar started the week under pressure against the euro, after its inability to capitalise on previous week's upbeat U.S. economic data fuelled suspicions that its New Year rebound had run out of steam.

The dollar came under additional pressure after South Korea's central bank said it would diversify its foreign exchange reserves away from government bonds into high yielding paper and a greater variety of currencies.

The Bank of South Korea later clarified its stance on its foreign exchange reserves, saying long-term plans to diversify them did not mean it would sell dollars. U.S. Conference Board's consumer confidence index for February also helped dollar as it came in above market forecasts, although its consumer expectations component fell.

January's much awaited U.S. consumer price index broadly met expectations. While appearing to reduce the chance of more-aggressive U.S. interest rate hikes, the report seemed to confirm the market's anticipation of gradual rate increases.

Meanwhile, minutes from the FOMC meeting suggested that interest rates remained too low to keep inflation stable, signalling that U.S. central bank remained on track in continuing raise interest rates.

Rising rates tend to make short-dated U.S. dollar-denominated deposits more attractive for foreign investors, adding to demand for the currency.

However, Fed minutes also showed that members had expressed concern about the widening U.S. trade imbalances. Meanwhile, European Central Bank policy makers signalled little chance of an euro zone interest rate increase for several months.

On the last trading day the dollar slipped against the euro after U.S. data showed the economy grew slightly less in the fourth quarter than a Federal Reserve official had hinted. U.S. fourth-quarter GDP growth came in up 3.8 percent, only slightly higher than economists' forecast for a rise of 3.7.

However, Federal Reserve Board Governor Ben Bernanke earlier said the GDP was going to be around 4 percent. The dollar was also pressured by U.S. existing home sales data showing single-family home sales fell 0.5 percent in January.

The financial markets are looking to next week's U.S. payroll numbers, manufacturing and service sector surveys for clues on the health of the U.S. economy. U.S. Federal Reserve Chairman Alan Greenspan will return to Capitol Hill on Wednesday to testify on the budget and U.S. economic outlook before the House Budget Committee.

European Central Bank is expected to keep interest rates at 2.0 percent when its meets on Thursday.

Range for this week: $1.3100-$1.3400

Japanese Yen

The yen kicked off the week under pressure against the dollar amid signs of weakness in the Japanese economy.

The yen was weighed by last week's data that showed Japan was in a recession for the best part of 2004. As the week progressed the dollar slipped against the yen pressured by unwinding of yen-short positions.

In addition South Korea's news to diversify its foreign exchange reserves, which fuelled speculation that Japan may do the same, underpinned the yen.

Meanwhile, North Korea's offer to return to six-party talks on nuclear disarmament and moves by China to allow companies to keep more foreign exchange income also boosted the yen.

However, the yen was not able to hold to its gains after South Korea said its plans to diversify its foreign exchange reserves were not new and did not mean it would sell the U.S. currency. Meanwhile, Japanese Finance Ministry also came to the dollar's rescue by saying it had no intention of changing its reserves.

Yen came under additional pressure after data showed Japan's trade surplus in January fell 59.9 percent from the same month a year earlier to 200.8 billion yen, below a median market forecast of 507.9 billion yen.

As the week came to an end, yen continued its soft tone after a report showed deflation deepening in Japan, with the core Consumer Price Index falling 0.3 percent in January from a year earlier, compared with a decline of 0.2 percent in each of the prior two months.

Range for this week: 103.70-106.70

Sterling

Sterling started the week on a strong foot against the dollar, finding favour as market focus shifted to differences in interest rates.

British interest rates stand at 4.75 percent, compared with 2.5 percent in the United States and strong economic data out of UK in recent weeks has fuelled expectations for another rate rise this year.

BoE Monetary Policy Committee member Kate Barker said in a newspaper interview that British interest rates might need to rise again but the peak in borrowing costs might not be much higher. Meanwhile, property web site Rightmove said that prices on British homes rose 2.3 percent from mid- January to mid- February.

Sterling extended its gains against the dollar after Bank of England minutes showed that one member of its policy-setting committee voted to hike interest rates.

Meanwhile, the confederation of British Industry said 20 percent of firms said their order books were above normal while 30 percent said they were below, leaving the total order books balance at -10 in February, up slightly from -13 in January.

Sterling ended the week higher against the dollar, recouping losses made earlier when data showed slightly disappointing fourth-quarter growth.

Next week brings further key data on the housing market and manufacturing sector, which includes the Nation wide February house prices survey and the CIPS February manufacturing survey.

Range for this week: $1.9050-$1.9350