Dollar continues to rally (page 1 of 2)

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.