Dollar at the mercy of speculators (page 1 of 2)

Euro

The dollar commenced the week on a back foot against euro, as market players and investors used potentially dollar negative U.S. data as an excuse to lock in profits from the currency's earlier gains.

The dollar turned tail from earlier gains as concerns over the United States external deficit problems were back under the spotlight. As the week progressed, the dollar flexed some muscles on news that the U.S. trade gap with China shrank in February from the prior month, despite the fact that the overall deficit hit a record high of $61.04 billion.

However, the currency trimmed its gains against the euro after minutes of the Federal Reserve's last meeting cooled expectations of more aggressive rate hikes.

The dollar continued to forge higher against the euro backed by Japanese investor demand and as market players were reluctant to bet against the greenback after its surprising strength in the face of poor economic data.

In addition, rumours that billionaire investor Warren Buffett was buying back the dollar after having made massive bets against the U.S. currency, also lent the dollar added support.

The greenback however, slumped on the last trading day of the week, as soft U.S consumer sentiment data overshadowed a report showing hefty inflows to U.S. assets that were sufficient to cover February's trade deficit.

The University of Michigan headline consumer sentiment index came in at 88.7, below analysts' forecast of 91.5. The New York Federal Reserve's Empire State Index also declined, dropping to a two-year low of 3.12 in April from a revised 20.18 reading in March.

Both numbers outweighed U.S. capital flows data, which showed healthy demand for dollar-denominated assets. Net purchases of U.S. assets were $84.5 billion in February, easily enough to counterbalance a record $61.04 billion in February.

In the coming week, markets will cautiously monitor U.S. inflation data to assess whether the Fed is likely to raise interest rates quicker that it has been in recent months.

Tuesday and Wednesday's Producer and Consumer price inflation data are seen key to providing the market with clarification on the level of price pressures building up in the U.S. economy. Fed Chairman Alan Greenspan is also due to speak to a Senate Budget Committee hearing on Thursday.

Range for this week: $1.2700-$1.3000

Yen

The Japanese yen started the week on a strong note after data showed Japan posted a larger than expected current account surplus for the month of February.

Japan's current account surplus narrowed 1.5 percent in February from a year earlier. Market forecasts had centred on a fall of 10 percent. The yen was also supported by a run of U.S data, which was largely expected to dent the dollar.

As the week progressed, the dollar staged a fight despite back-to-back weak US economic data, indicating that markets are more concerned about the prospect of rising interest rates in the United States.

However, the dollar was seen stifled by markets torn between two views about the currency's prospects. It was supported by expectations the U.S. Federal Reserve would raise interest rates at its next meeting and beyond, but it was capped by persistent concerns that the swelling deficits would become unmanageable.

The yen was also hurt after a report from Russia's Itar-Tas news agency said North Korea is to strengthen its "atomic potential". Meanwhile comments from U.S.