Dollar continues to rally

Euro

The dollar started the week on a strong footing against the euro after previous weeks larger than expected growth in the U.S. labour market eased worries about the U.S economy. Furthermore, helping the dollar was China's silence over the weekend on the Yuan policy.

As the week progressed, dollar continued to trade in a tight range against the euro. Market's attention shifted to a report due later in the week, which was expected to show the U.S. trade gap swelling to a record $61.5 billion in March.

Meanwhile, rumours of a hedge fund in financial trouble sent U.S stock prices lower, discouraging foreign investors from buying risky U.S assets. The trade deficit and increasingly acute pressure on the United States to attract foreign investment to fund it have been a persistent weigh on the dollar over the past three years.

However, the dollar rallied towards a one-month high against the euro after data showed a narrower than expected U.S trade deficit. The trade deficit contracted to $54.99 billion in March, surprising many in the market that had expected it to widen to a record $61.5 billion.

As the week drew to a close the dollar pushed the euro to its lowest level since seven months. U.S retail sales surged 1.4 percent in April in a broad-based gain, up from March's upwardly revised 0.4 percent increase and overshooting expectations for a 0.7 percent rise.

Data released on Friday showed that U.S import prices rose 0.8 percent in April, double market forecasts as costs for imported oil and industrial supplies continued to advance in a potential risk to inflation. The report is an early inflation warning in the production chain that eventually shows up in consumer prices.

Meanwhile, euro zone finance ministers highlighted their concern over the sluggishness of the region's economy. Data on U.S capital inflows, inflation and industrial production next week will allow investors to judge whether the world's largest economy really had recovered from a soft patch earlier this year.

Range for this week:$1.2480-$1.2780

Yen

The Japanese yen kicked off the week under pressure against the dollar as traders decided that China wouldn't loosen its fixed currency soon.

Meanwhile, yen hardly budged after a U.S. Treasury spokesman said that China was a step closer to allowing its currency to trade freely following 'productive' talks in Washington among Treasury and Chinese central bank officials.

Furthermore, the deputy governor of China's central bank said that Beijing was technically ready for currency reform, however, the United States would not push them into it.

As the week progressed the yen spiked up and touched 104.89 against the dollar after the People's Daily newspaper reported on its web site that China would widen its currency band next week.

However, the yen retreated after China's central bank said there was no change in their policy. The newspaper later withdrew the report. As the week was coming to an end, mixed Japanese machinery orders failed to support the yen.

Core private sector machinery orders rose 1.9 percent in March, a little better than market expectations for a fall of 1 percent. However, the Cabinet office forecast orders to fall by 3.1 percent in April-June quarter from the previous month. Furthermore, foreign selling of Japanese stocks was hurting the yen.

U.S Treasury Secretary John Snow renewed pressure on China to let its currency trade freely; saying the United States had made clear it wants Beijing to move to a flexible exchange rate.

U.S lawmakers and manufacturers complain the Chinese currency's link to the dollar keeps prices for Chinese goods low and hurts U.S manufacturers. The Bush administration is under pressure from congress to show progress in moving China toward a flexible currency to rein in the U.S trade deficit with the Asian giant, which hit $162 billion last year.

Speculation about the revaluation of the yuan continued in the background, with a stronger Chinese currency seen leading to rises in other Asian Currencies. Chinese central bank governor Zhou Xiaochuan said on Friday that reform of the yuan would be driven mainly by domestic factors but China would listen to views in the process.

Japanese Finance Minster Sadakazu Tanigaki warned that authorities would act if the foreign exchange market turned volatile due to speculation over China's currency policy. Japanese economic growth and current account figures are both due early next week.

Range for this week: Y105.80-Y108.80

Sterling

Sterling started the week under pressure against the dollar as evidence piled up of a slowing British economy.

News of a sharp fall in British manufacturing output fuelled speculation that the next move in Bank of England interest rates could be down. Manufacturing production fell by 1.6 percent in March, confounding market analysts who had predicted a modest rise.

The dollar continued its upbeat movement against the sterling after a report showed British retail sales falling at a record annual pace in April, adding to evidence of a slowing UK economy.

British retail sales fell 4.7 percent on a like-for-like basis in April, the biggest annual fall since it began compiling records a decade ago. Furthermore, sterling came under additional pressure after the Bank of England said in its May inflation report that it cut its forecast for growth because of a slowdown in consumer spending.

Next week financial markets would look to UK inflation data and minutes for the Bank of England's latest policy meeting for clues on the outlook for interest rates.

Range for this week: $1.8360-$1.8660