US dollar holds upper hand

The data calendar looks slim during the coming week, but the greenback is likely to hold the upper hand, as markets remain split on the future of global currencies in the face of the latest dollar revival.

Euro

Easter turned out to be sour for the 12-nation single currency as it came under pressure at the start of the week following renewed optimism over US growth prospects and wide-spread belief of aggressive rate hikes by the US Federal Reserve - in it's bid to maintain price stability.

As the tug-of-war between the two currencies continued, the euro looked increasingly vulnerable as market players continued to focus on the potential for higher US interest rates. The release of a lower-than-expected consumer confidence reading failed to dent the dollar's stride as trading remained subdued in the run up to key data releases.

The Conference Board, a private business group, said that its' gauge of US consumer sentiment eased to 102.4 in March from an upwardly revised 104.4 in February.

However, the final reading of the US fourth quarter GDP, which recorded a lower than expected 3.8 pct against forecasts of 4.0 pct, took some shine off the greenback as a profit-driven sell-off allowed the euro some respite, taking it close to $ 1.3000 levels.

As the week progressed, interest rate differentials dominated trading patterns as markets focussed on the Fed's favourite gauge of inflation - the core PCE index. The index, which strips out volatile food and energy prices, rose 0.2 pct in February, in line with expectations and slightly lower than a 0.3 pct gain, in January.

The release of a stronger-than-expected Chicago Purchasing Manager's index, which rose to 69.2 in March, recording its highest level since 1988 added fresh support to the dollar. The numbers put to rest immediate worries of inflation, although markets remained cautious ahead of the weekend release of the all-important US jobs report.

The single currency fetched $1.3000, as thin trading conditions forced currencies into pre-defined ranges. The deadlock finally came to an end, as the US labour department reported that only 110,000 jobs were added to the economy in March, well below expectations of a number of 220,000 and a revised 243,000 in February.

The data triggered an immediate rally in the single currency, which zoomed higher to $ 1.3070 helped by the weak US number. However, the euro's joy proved to short-lived, as the release of upbeat US ISM manufacturing and non-manufacturing indices brought the dollar bulls back in to the fray.

The resultant move not only helped the dollar regain all its losses but also pushed the euro to below $1.2900. Comments by Chicago Fed President Michael Moskow who said that the Fed was concerned about inflation also supported the dollar's fortunes.

Currency markets are likely to remain range bound in the coming week, as a lack of key data could have a detrimental impact on liquidity. Speeches by Fed Chairman Greenspan and comments from policy makers will receive attention, as the dollar looks for a consolidation of its footing. The ECB will also hold its bi-weekly policy meeting, but interest rates are likely to be kept unchanged at 2.0%.

Range for this week: $1.2800-$1.3100

Yen

The yen struggled for direction at the start of the week, as the dollar held the trump card in the form of expectations of higher interest rates and continued to advance in thin trading conditions due to the extended Easter weekend.

Japanese importers covering up their bills ahead of the Japanese fiscal year-end also contributed to the yen's fall which was pushed to a fresh 5-month low of 107.70 per dollar - last seen in October 2004.

With markets betting on aggressive policy tightening by the US Federal Reserve the dollar remained firm against the yen as markets awaited the release of the bank of Japan's quarterly Tankan business sentiment survey.

The Tankan diffusion index for big manufacturers came in at plus 14, much lower than forecasts of a reading of plus 23, and also below the previous reading of plus 22. Although the positive number indicated an expansion in business activity, the reading raised doubts over the country's economy and the strength of its fledgling recovery.

The data intensified the pressure on the currency, but the lack of liquidity kept a lid on the currency's losses.

The Tankan followed on the heels of another weak indicator - the Japanese industrial output that dropped 2.1 pct in February from a month earlier, but sentiment remained split as the survey also showed companies expecting to boost capital spending in the new fiscal year that began on April 1.

The weekend had a roller-coaster impact on the currency as the weak US jobs number initially helped the currency reach a high of 106.77 per dollar, whilst a reversal saw it closing at 107.60 levels - precariously close to a key technical level at 108.00 per dollar.

Range for this week: Y105.30 - Y108

Sterling

Sterling opened its account on a quiet note after trading in ranges in holiday-thinned trading at the start of week, suffering mild losses against a broadly stronger greenback.

Data showing a rise in mortgage approvals in the United Kingdom put the pound back on track as it hit a three-week high against the euro in subdued market conditions. As the week progressed, Sterling continued to gain against the 12-nation single currency as it derived support from buying against cross currencies.

The Confederation of British Industry's monthly distributive trades survey showed British retail sales balance fell to - 9 from +2 in February, well below forecasts for a reading of +6.

However, the data was largely shrugged off, as the pound remained steady due to the market's concentration on higher yielding currencies. As the week drew to a close Sterling came under renewed pressure after a hefty rally in the greenback following a mixed batch of economic data that ended in the dollar's favour.

The currency also failed to derive support from a report showing a pick up in British manufacturing output in March from a 1-½ half year low in February.

In the coming week, the release of the UK services sector PMI and industrial production will be watched closely together with the Bank of England's Monetary Policy Committee meeting where no change in interest rates are expected.

Range for this week: $1.8700-$1.9000