US data awaited next week

Euro

The dollar started the week on a strong foot against the euro as the market shrugged off a surprisingly weak U.S. jobs report and focused on data suggesting inflation could rise.

Furthermore, the dollar was well supported after the Federal Reserve Bank of St. Louis President William Poole said "the risk of higher inflation over the next six months or so seems clearly greater than the risk that inflation will fall below a desirable range".

Financial markets expect the Fed's campaign of "measured" rise in interest rates to continue. The euro came under additional pressure after the European Commission downgraded growth forecasts for the euro zone to 1.6 percent in 2005 from an original estimate of 2 percent.

This was due to high oil prices as well as the euro's relative strength. Analysts said the downgrade was not unexpected following recent weak data, making it harder for the European Central Bank to justify raising interest rates.

Meanwhile, a U.S. Treasury Department spokesman said foreign exchange issues are unlikely to be a major topic of discussion at the upcoming meeting of finance chiefs for the Group of Seven industrial nations, which will be held in Washington in mid-April.

Furthermore, the spokesman said if foreign exchange issues are taken up at the G-7 meeting, the United States will affirm its existing currency policy, suggesting that there is no change in the nation's "strong dollar" policy.

U.S. Treasury Secretary John Snow pointed out that the U.S. deficit problem is attributable to the economic growth gap between the U.S, Japan and Europe. His remarks indicated the United States might ask Japan and Europe to accelerate economic growth at the G-7 meeting.

As the week progressed, the dollar continued its bullish tone after euro zone service index came in flat at 53 in March, broadly in line with expectations. However, the new business index slipped to a three-month low of 51.4 from February's 52.

Furthermore, the dollar found additional support after Chicago Federal Reserve Bank said its Midwest manufacturing index rose to 120.0 in February. Meanwhile, as expected the European Central Bank kept its interest rate unchanged at 2 percent.

Next week, financial markets will focus on data released, looking for signs on whether speedy rate rises in the United States will be sufficient to offset worries about structural problems in the world's largest economy.

Moreover, the Federal Open Market Committee (FOMC) will release minutes from its March 22 meeting on Tuesday, and analysts will look for confirmation of the recent warnings on inflation issued by some Federal Reserve officials.

U.S. trade data and figures on foreign capital inflows into U.S. assets will also be closely scrutinised to see whether the world's largest economy is growing fast enough to attract the foreign cash it needs to plug its trade shortfall.

Range for this week: $1.2780-$1.3080

Yen

The Japanese yen kicked off the week under pressure against the dollar. Financial markets showed little reaction to comments from Japan's Finance Ministry that there are currently no plans to change the currency composition of its foreign exchange reserves.

Further clarifying Prime Minster Junichiro Koizumi's remarks last month that had sparked speculation Japan could sell dollars to diversify its $840.6 billion reserves.

As the week progressed, the dollar continued its strong move against the yen, supported by expectations for higher U.S. interest rates. Meanwhile, as expected the Bank of Japan kept its monetary policy unchanged.

However, BoJ Governor Toshihiko Fukui confirmed that one policy board member had disagreed with the board's decision to keep monetary policy unchanged. He also added, "the BoJ will remain committed to a quantitative easing based on the CPI (consumer price index)"

As the week came to an end, the yen managed to regain some of its losses after Japan's core private sector machinery order, a key gauge of trend in capital spending, rose 4.9 percent in February from a month earlier, well above market expectations.

Range for this week: Y106.75-Y109.75

Sterling

As the week started sterling managed to regain some of its looses supported by economic data showing a rise in British house prices and a strong service sector.

Data from the Halifax, the nation's largest mortgage lender, showed prices up 0.5 percent in March and underscored expectations that Britain's housing market is stabilising.

Meanwhile, activity in the country's service sector expanded at its fastest pace in almost a year in March, according to the Chartered Institute of Purchasing and Supply/NTC main service sector index.

Sterling failed to hold to its gains after data underlined the fragility of the British manufacturing output, which fell for the first time in six months in February. Furthermore, Bank of England kept its interest rate unchanged at 4.75 percent.

Meanwhile, BoE has identified the consumer spending as the biggest downside risk to the economic outlook and so far the marked slowdown seen at the end of 2004 appears to have extended into 2005. Policy makers are hoping the slowdown is temporary.

BoE Governor Mervyn King has pointed out that data around the turn of the year are always difficult to interpret. Furthermore, analysts said uncertainly ahead of a British general election on May 5 could start to weigh on sterling as opinion polls suggested a closer contest than any since 1992.

Next week investors will ponder the prospects for interest rates in the UK, with data due on the labour market and the retail sector.

Range for this week: $1.8700-$1.9000