Unexpected dollar rally

Euro

Concerns over Europe's political and economic cohesion have weighed heavily on the euro in recent weeks. Calls for lower rates in the euro zone contrast with the rising rates in the US, a factor underpinning dollar gains and has a compounding effect on the euro's negative sentiment.

The euro started the week on the back foot following the failure of the EU summit and the deep political differences among key EU members. The euro extended its losses after reports suggested that ECB policy makers may start considering an interest rate cut if euro zone data do not show any signs of improvement in the economy.

Adding fuel to fire, the political pressure on the ECB increased further after the decision by Sweden's Riksbank to cut its key interest rates by 50 bps to a historic low level of 1.5 pct to spur economic growth.

The Riksbank move raised concerns about the outlook for the euro zone and ECB rates and had a spillover effect onto the euro, which slipped within a cent of a recent 9-month low against the dollar.

Later, the dollar came under some pressure as some currency market participants began to rethink the likelihood of an imminent interest rate cut from the ECB, particularly as more and more officials downplayed that scenario. Also the dollar's broad reversal lower was fueled by market rumors that China was a step closer to revaluating its currency.

As the week progressed, the single currency drifted lower once again as market players continued to mull the possibility of lower interest rates in the euro zone following a dovish report from the BOE.

The release of minutes of BOE added to speculation that interest rates in Europe were headed lower and raised the pressure on the ECB to cut interest rates to stimulate domestic demand.

As the week came to an end, the dollar initially rode on the euro's weakness flexing muscles near a ten-month high. However, the dollar was slammed by disappointing US data in the form of US durable goods orders, that rose 5.5 pct in May, boosted by aircraft demand, but was down 0.2 pct excluding transportation, the third decline in the past four months.

With next week likely to bring another Fed rate hike plus reasonably strong news from the economic front, more gains in the dollar are likely over the next few days.

Range for this week:$1.1900-$1.2250

Yen

The dollar retained a bullish tone against the Japanese yen at the beginning of the week on expectations of further US interest rate hikes.

However, a bout of profit taking amid renewed speculation that China might soon loosen its currency controls pushed the dollar lower following a break of key technical barriers.

Japanese Finance Minister Sadakazu Tanigaki has stepped up his rhetoric calling for China to loosen the yuan's peg to the dollar, and traders snapped up the yen as an easy proxy for any yuan appreciation.

As the week progressed, the dollar recouped some of the earlier losses versus the yen as speculation of an imminent revaluation of the Chinese yuan cooled after the President of the Bank of China suggested Beijing was in no rush to revalue its currency.

In addition, The Japanese yen was rattled by data showing that Japan posted a trade surplus of just 297 bln yen in May, far below the consensus forecast of 521 bln yen.

As the week was coming to an end, the yen edged up against the dollar supported by improved business confidence in Japan. However, the dollar maintained its bullish tone supported by concerns over rising oil prices.

Separately, the closely watched testimonies by US Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan on China/US economic relations before a congressional committee turned out to be less dramatic than many had been expecting as both men stuck to familiar themes on China.

Range for this week: Y107.00-Y110.00

Sterling

A raft of lending data and the minutes of Bank of England's last policy meeting were in focus by market players, hunting for clues on future interest rate direction.

Sterling started the week on a relaxed tone versus the dollar as its recent moves have been largely determined by the European single currency which has fallen sharply on expectations of an interest rate cut in the euro zone.

The British pound came under pressure versus the dollar after the publication of the minutes of the rate setting meeting of BOE showed two monetary Policy Committee members voted for a rate cut, including the bank's chief economist. The unexpected surprise triggered concern that the US's main trading partners may be forced to cut interest rates.

As the week was coming to an end, the pound managed to find some support as the dollar was giving back some of its earlier gains in technically driven pre-weekend trading.

Range for this week: $1.8100-$1.8400