US dollar consolidates its gains

Euro

The euro was forced to deal with a spate of problems associated with its political objectives as Germany called for early elections, whilst the French will be at the polls this weekend to vote on a referendum on the EU constitution.

The dollar scored heavily as it climbed to fresh seven-month highs against the euro, Sterling and Swiss franc whilst yuan revaluation related talk kept the yen from losing further. The French vote is likely to be in focus whilst the release of key economic data from all major nations could see nerve-wracking moves in the week ahead.

The euro opened its account on a weak note after being battered all of the previous week following upbeat US economic data that signalled rapid growth in the United States and gave rise to hopes of an end to the recent decline in the US dollar.

News of a possible rejection of the European Union constitution by the French at the referendum also cast a shadow on the euro's recovery prospects as the currency traded close to levels last seen seven months back.

And the news of a crushing defeat for Germany's ruling Social Democrats in a regional poll that forced Chancellor Gerhard Schroeder to call for early federal elections also dealt a crucial blow to the 12-nation single currency.

Meanwhile, the release of the minutes of the last US FOMC meeting that received attention from all quarters proved to be a non-event as the Fed was seen to be cautious with its wording indicating that future interest rate rises would be in line with economic growth.

The minutes also showed that some members had expressed concerns of a slowdown, whilst others had zeroed in on an 'upcreep' in inflation signifying an imminent pause in the Fed's cycle of monetary tightening. The dollar retained a softer tone following the release of the Fed's minutes, but was still within sight of highs of $ 1.2535 - seen at the start of the week.

As the week progressed, the euro's woes intensified as the key German Ifo business sentiment survey returned its lowest reading since August 2003, and recorded its seventh consecutive dip. The Ifo index came in at 92.9 for May, offering little hope of a pickup in Europe's largest economy.

US durable goods orders that rose 1.9 pct, but showed a surprising drop of 0.2 pct excluding the transportation sector failed to add direction to the market, that was content with trading within a well defined range - between $ 1.2530 and $ 1.2630.

The release of first quarter US GDP that grew 3.5 pct, also failed in its bid to break the range as traders looked ahead to the French referendum and key technical levels for further direction. As the week drew to a close, the euro succumbed to the pressure inserted by dollar bulls and fell to $ 1.2492, although it recovered swiftly as traders readjusted their positions ahead of the weekend vote.

A dip in the University of Michigan's consumer sentiment index in May that fell to 86.9, and a smaller-than-expected rise in US consumer spending failed to excite markets as traders on both sides of the Atlantic prepared for the long weekend and the referendum in France.

London and New York will be closed on Monday for a special bank holiday and a Memorial Day respectively but all eyes are likely to be on the French vote today, as a rejection would cause political jitters that could turn sour and pile further pressure on the single currency.

On the data calendar, the release of US consumer confidence, ISM manufacturing and non-manufacturing indexes and the all-important non-farm payrolls are likely to grab the headlines through next week.

Range for this week: $1.2460-$1.2760

Yen

The Japanese yen commenced the week on a softer tone, as Tokyo continued the previous weeks' dollar rally pushing the yen lower to 108.30 per dollar in early trading.

With market focus falling on developments in Europe, the yen remained on the sidelines with exporter sales of dollars above the 108 level and speculation on a possible revaluation in the Chinese yuan keeping a check on a further slide in the Japanese currency.

A report in the Financial Times about the United States having urged China to re-value its currency by 10 pct was taken with a pinch of salt, as the news was largely ignored by market players who showed no reaction in the absence of any confirmation from officials.

A Chinese official later stated that they had received such a request, but said, 'the time was not right' for such a move, and cautioned the United States against pushing too hard for currency reforms.

The release of a mixed batch of economic numbers and the minutes of the last US FOMC meeting helped the yen keep its' head above the surface, although a weekend spike in the dollar pushed it back closer to one-month lows around 108.00.

Japan releases its industrial production and unemployment data for April next week, but it is likely to be over shadowed by key data from the United States that may give fresh clues on the direction of interest rates in the US. In addition, developments on the Chinese yuan revaluation story may also have a limited impact on the Japanese currency's fortunes in the week ahead.

Range for this week: Y105.90-Y108.90

Sterling

The Great British Pound had a rough start to the week after a survey showed that house prices in England and Wales were on the decline, adding to the speculation of a peak in British rates and putting an end to any hopes of a further hike.

As soccer fans of Liverpool prepared to make the journey to Turkey for the European Cup Final against AC Milan, Sterling's fortunes rested on the performance of the domestic economy and the outcome of the French vote.

Analysts said that a 'no' vote in France could support Sterling, whilst an 'yes' could add pressure on UK's currency. The currency received another shock after data showed that the British economy grew at its' weakest pace in nearly two years in the first quarter, due to a slump in manufacturing.

A survey that showed a marginal improvement in British factory order books and manufacturers the most pessimistic for five months on output added to the rot as the currency was pushed below $1.8200 for the first time in seven months in the face of a broad based dollar rally.

In the week ahead, the outcome of the French vote, and the release of UK consumer confidence and manufacturing data is likely to be watched closely for clues on the direction of British interest rates and Sterling.

Range for this week: $1.8200-$1.8500