Uncertain US dollar outlook

Euro

Last week, a mixed array of economic reports had a subdued effect on the dollar, which briefly slipped to new session lows before steadying.

A strong reading in employment component in the Chicago purchasing managers index for February was offset by some weaker than expected housing data. In addition, a relatively soft ISM report failed to give the dollar much support.

As the week progressed, the dollar gained some momentum on the back of generally soft euro zone indicators which weighed on the single currency and paved the way for dollar upswings, underscoring just how little lift the dollar is getting from otherwise supportive economic fundamentals, it failed to rise on news of a sharp rise in German unemployment and news on euro-zone inflation rising at an annual rate of 2.0 percent in February, slightly below expectations of 2.1 percent.

Also profit-taking in euro/yen, thought to be related to eurobond redemptions being repatriated to Japan, also weighed on the euro.

The euro dropped against the dollar on the back of negative comments on Germany from ratings agency Standard & Poor's this afternoon, which overrode the effect of weaker-than-expected US ISM manufacturing data.

S&P affirmed its ratings on Europe's largest economy but said it is falling behind its AAA-rated peers in terms of fiscal and economic performance. However, dollar's solid performance came to a halt after US Federal Reserve chairman Alan Greenspan failed to talk about interest rate in his testimony to US lawmakers.

A number of market participants had been predicting more hawkish rhetoric from the Fed chairman to the US House Budget Committee, possibly even an indication that future monetary tightening may become more aggressive.

Instead, Greenspan spoke about the budget deficit and urged Congress to act decisively to rein in rampant government spending.
By weekend, the market was getting more jittery about Friday's US crucial non-farm payrolls report for February, a key release in the interest rate outlook.

However, initially the dollar did not go into reverse against the euro as sentiment surrounding the single currency remained negative after sources revealed that the ECB is slashing its growth forecasts for the 12-nation currency zone for the coming two years.

The dollar slipped back on news that the US did not generate sufficient amount of jobs to prompt more aggressive action from the US Federal Reserve.

The U.S. economy created 262,000 jobs in February, the biggest gain in four months, however, the data disappointed some market players who had hopes for a bigger number.

Range for this week: $1.2950-$1.3300

Yen

The Japanese yen started the week flexing muscles on the back of a raft of Japanese economic data which boosted hopes that the world's second-largest economy is on the mend.

Those hopes were encouraged by news that industrial production in January rose 2.1 pct from the previous month, way above forecasts for a 0.8 pct rise and December's 0.8 pct fall. There was further good news on retail sales, which rose 2.2 pct in January on a year-on-year basis.

The yen garnered support from a slew of data confirming that the economy has indeed bottomed. That impression appears to be held by the Bank of Japan governor Toshihiko Fukui, who downplayed the prospects of another recession following recent disappointing GDP data.

Fukui also said the central bank will closely monitor currency movements and their possible adverse impact on the economy.

As the week progressed, yen remained firm after very strong Japanese household spending data surpassed all expectations, as well as gaining support from lower oil prices. Later, the dollar picked up strength against the yen ahead of an appearance by Federal Reserve Chief Alan Greenspan before the U.S. House of Representatives Budget Committee.

The dollar also got some support from continued market speculation of heavy capital outflows from Japan once the central bank lifts its full guarantee of bank deposits in April.

The dollar's upside though was capped by further capital repatriation by Japanese firms ahead of the end of the fiscal year. As the week came to an end, yen moved in narrow range against the dollar.

Range for this week: $104.00-$107.10

Sterling

Boosted by growing expectations the Bank of England might soon raise interest rates, sterling hit its highest level of the year against the dollar, moving above $1.9250 before easing back.

Meanwhile, Bank of England rate setter, Marian Bell, highlighted that monetary policy should be set 'neither too hot nor too cold'. For her, the right temperature involves making sure that expectations for CPI inflation are anchored to the 2.0 pct target and correctly predicting interest rates after price pressures are factored in.

Bell, an independent member of the nine-strong rate setting panel is said to have dovish leanings. The BoE's benchmark repo rate has been stuck at 4.75 pct since August, after a series of 5 increases going back to November 2003 in order to rein in robust consumer spending and borrowing levels.

As the week progressed, sterling weakened after a key survey on the UK services sector came in below expectations.

By weekend, sterling shot up after disappointing jobs data wounded the dollar. Next week the BoE's MPC meets and will announce any changes in interest rates on Thursday.

Range for this week: $1.9150-$1.9300

Australian

As the week started, the Australian dollar opened firmer ahead of a widely expected interest rate rise.

The Reserve Bank of Australia (RBA) raised the cash rate 25 basis points to 5.5 pct, citing stronger inflationary pressures from both capacity constraints and domestic confidence.

The decision, which was the first movement in rates in 15 months, came after increased noise from the central bank governor Ian Macfarlane and his board over recent months about the risks to the outlook for inflation, which they want to keep in their 2-3 pct growth target range.

Later, the greenback strengthened versus the Australian name-sake supported by a widening Australian current account deficit which weighed on the Aussie down. Australia's current account deficit widened to a$15.17 billion in the fourth quarter, a record and around 7 percent of gross domestic product, according to economists.

Though the Reserve Bank of Australia increased its key interest rate, the prospect of any further tightening has decreased in the wake of news that the Australian economy rose by a mere 0.1 pct in the fourth quarter, taking the year-on-year expansion down to 1.5 pct.

Range for this week: $0.7720 - $0.7950