EU future rattles currencies

Euro

The European single currency lost ground at the start of the week after France rejected the European Union constitution in a referendum, raising doubts over the political future of the euro zone.

Preliminary estimates put the 'No' vote at 55 pct, higher than polls suggested before the referendum. Following the France's vote, an exit poll showed a firm rejection of the European Constitution by the Netherlands.

The exit poll showed 'No' votes made up 63 pct of the total, compared with 37 pct in the 'Yes' camp. The Dutch opposition to the EU charter has been driven in part by dislike of the euro, while the French voted against the constitution partially because of concerns it would become a threat to social protection.

Surveys of euro zone economic, business and consumer sentiment published by the EU Commission showed a deterioration in May, underlining the gloomy attitude in Europe which help to sink the charter in French and Dutch referendums.

A meeting attended by high-level German financial officials also discussed a report indicating that possible failure of the European Monetary Union, the system that gave birth to the euro.

In response to the report, the German Central Bank said it ruled out failure of the EMU and added that German Finance Minister Hans Eichel and Bundesbank President Axel Weber saw the euro as a 'unique success story'.

The negative reports also came on top of weak economic data that showed the euro zone manufacturing sector contracted for a second month in May as output and exports shrank in two of the bloc's top three economies, France and Italy. The NTC Research Eurozone Purchasing Managers' Index fell to a 22-month low of 48.7 in May from 49.2 in April.

Over the week, markets paid little attention to mixed U.S. economic data. The Chicago purchasing management index of regional factory and business activity in May fell to 54.1 in May, below forecasts of 62.0.

However, U.S. consumer confidence for May came in at 102.2 versus expectations of 96.5. And a report showed first-quarter productivity grew by 2.9 pct, compared with 2.6 pct in the fourth quarter of last year.

Nonetheless, non-farm payroll jobs rose by 78,000 in May, much lower than economists' forecasts for a rise of 185,000. The unemployment rate fell to 5.1 pct, compared with expectations of 5.2 pct.

Close to the weekend, the European Central Bank left its interest rates unchanged at 2 pct, as expected, rejecting calls for a cut to help reverse the economic slowdown in Europe.

The U.S. deficit and testimony from the Federal Reserve Chairman Alan Greenspan will take centre stage next week to assess the pace of future U.S. interest rate hikes. In Europe, markets will keep a close eye on a meeting of European Union finance ministers for further clues on the political and economic outlook of the euro-zone.

Range for this week: $1.2100-$1.2400

Yen

The yen began the week trading around 108 levels against the dollar, shrugging off data, which showed jobless rate fell in April to a seven-year low of 4.4 pct from 4.5 pct in March.

At the same time the Purchasing Managers Index indicated that manufacturing activity was at a seasonally adjusted 53.5 in May from 53.3 in April.

During the week, the yen traded within tight ranges, as main market's focus was on the political and economic outlook of euro zone after most of French and Dutch voted for 'No' to EU constitution.

Next week, finance ministers from the Group of Eight industrialised nations will meet, ahead of July G8 summit in Scotland. Markets are eager to hear if any new pressure will be exerted on China to revlaue its currency.

Range for this week: Y106.00-Y109.00

Sterling

At the beginning of the week, sterling moved higher against the euro and the dollar in the wake of French 'No' vote on the EU constitution and after retails sales and consumer confidence figures in UK came in line with expectations after a run of poor economic data in recent weeks.

As the week progressed, the pound trimmed its gains as weak British manufacturing and consumer credit data contrasted with recent strong U.S. numbers.

The Chartered Institute of Purchasing and Supply/NTC Research said British's manufacturing sector shrank at its fastest pace for over two years with the Purchasing Managers' Index falling to 47.3 in May from 49.1 in April.

The Bank of England said that British consumer credit rose by its smallest amount in one and half years in April while growth in mortgage lending picked up slightly. Consumer credit rose 1.3 billion pounds in April, less than 1.5 billion rise expected and the weakest since December 2003.

Week ahead, markets will focus on industrial production data for April, international trade figures and the Bank of England's interest rate decision, with expectations the BoE will leave interest rates steady at 4.75 pct.

Range for this week: $1.8000-$1.8300