Dollar rally on US rate rise

Euro

The euro was under pressure at the start of the week from worries that the French may vote against the proposed EU constitution in a referendum on May 29.

The euro also lost ground on news that euro zone manufacturing contracted for the first time in 20 months in April as softer global growth and a strong euro hurt exports. The euro zone's PMI index fell below the 50 line that divides growth from contraction for the first time since August 2003, hitting 49.2.

Moreover, further data showed euro zone unemployment rate rising in March to 8.9 pct. During the week, the dollar seesawed against the euro on mixed U.S. economic figures. U.S. Institute for Supply Management reported that its manufacturing gauge slipped to a 21-month low of 53.3 in April from 55.2 in March.

Meanwhile, U.S. construction spending jumped a surprisingly large 0.5 pct in March to a record high. U.S. factory orders also rose 0.1 pct in March compared with a downwardly revised fall of 0.5 pct in February.

As expected, the U.S. Federal Reserve hiked interest rates by 25 basis points to 3%, the eighth quarter-point rise in eight meetings since last June, and clarified more than an hour later that it expected long-term U.S. inflation to remain contained.

In a statement accompanying the Fed rate decision, the U.S. central bank voiced its concern about rising prices as the economic expansion matures, apparently offsetting worries that U.S. growth may be slowing down.

On the opposite side of the Atlantic, the European Central Bank kept interest rates unchanged at 2% and offered a grim short-term outlook for the euro zone economy. At a news conference following the bank's decision, ECB President Jean-Claude Trichet ruled out a cut in interest rates in the near term.

On the last trading day, the dollar rallied sharply against the euro after the April jobs data indicated that the U.S. labour market was stronger than anticipated. U.S. non-farm payrolls rose by 274,000 in April above economists' forecasts of a 170,000 rise.

The U.S. jobless rate was at 5.2 pct, matching forecasts. The figures also suggested that the Fed could raise its interest rates further.

In the coming week, market's main focus will be on April U.S. retail sales and March U.S. trade data for further clues about the U.S. economic outlook. Meanwhile, In Europe, gross domestic product data for the first quarter will be closely watched.

Range for this week: $1.2700-$1.3000

Yen

The Japanese yen weakened against the dollar at the beginning of the week as talk cooled that China was about to relax the yuan peg. A state-run Chinese securities journal said that deepening reforms had created conditions for China to adjust the yuan's trading band.

In addition, Chinese Trade Minister Bo Xilai stated that Beijing wanted to be very careful about adjusting the value of the yuan in the face of international pressure to revalue. China's finance minister also said speculation about a change in its currency regime made it hard to bring in reforms right now.

Meanwhile, Chinese Vice Finance Minster Li Yong mentioned that he did not think upward pressure on the yuan was so great, but urged currency speculators to be patient over yuan reform. The Japanese unit and other Asian currencies are likely to be the biggest gainers if the Chinese currency is revalued.

China manages its currency in a narrow band near 8.28 per dollar. The yen's losses were also accelerated by reports that North Korea may have test-launched a short-range missile into the Sea of Japan, stoking fears that Pyongyang could be headed next toward a nuclear test.

Meanwhile, the Japanese defence ministry said that the type of missile that may have been launched did not pose an immediate threat to Japan's security. The yen traded within tight ranges during the week as Japan was closed from Tuesday to Thursday for Golden Week holidays.

Range for this week: Y103.50-Y106.50

Sterling

Sterling tumbled against the dollar and the euro after data showed weakness in the British economy.

British manufacturing activity contracted for the first time in almost two years in April, according to purchasing managers' data, hitting 49.5 from 51.5 in March.

Moreover, British retail sales fell unexpectedly in April at their sharpest pace in nearly 13 years, according to the Confederation of British Industry's monthly distributive trades survey, which registered a balance of -14, down from -9 in March.

However, the pound hardly moved after the British Chartered Institute of Purchasing and Supply said its construction purchasing managers' index edged up to 54.8 in April from 54.7 in March.

As the week progressed, the sterling's losses were accelerated as British election results showed Prime Minister Tony Blair had returned to power but with a greatly reduced majority. Blair was heading for a majority of 70 seats or less in the 646 seat House of Commons, sharply down from 161 last time.

Data showing a slowing British property market also weighed on the pound, reinforcing expectations the Bank of England will leave interest rates on hold at 4.75 % next week, and may even cut rates before the end of the year.

Week ahead, the Bank of England's interest rates decision and its quarterly inflation report will be closely watched.

Range for this week: $1.8750-$1.9050