US dollar in broad based rally

Euro

A meeting of G8 leaders in Scotland and the release of key US jobs data are likely to keep traders on their toes but a trend reversal looks unlikely as the dollar looks poised for further gains in the week ahead.

The euro commenced the week on a positive note as it continued its recovery following the breach of the key $1.2000 levels at the end of the previous week.

The release of the German Ifo business sentiment index that rose to 93.3 in June from 92.9 in May failed to add momentum to the move as markets remained cautious on buying into the currency ahead of the US FOMC meeting slated for later in the week.

The rise in sentiment was also attributed to the upcoming elections in Germany and the weaker euro as firms in Germany were seen to be optimistic of the future.

As the week progressed, crude oil prices that hit a record $60 per barrel proved to be negative for the dollar, as investors questioned the ability of the US economy to withstand higher energy prices.

With movements in crude oil prices being the main driver of currencies, a bout of profit taking on oil brought about a reversal in the dollar's fortunes as it regained all lost ground resulting in a 180-degree turnaround.

The dollar was also supported by a report indicating US Consumer Confidence rose to a 3-year high of 105.8 in June from an upwardly revised 103.1 in May. The news boosted the greenback as market players assessed the increasing differential of interest rates between Europe and the United States.

The dollar rally was fuelled further by the US Federal Reserve, who raised the official 'Fed funds rate' for the 9th time in a row to 3.25 pct in line with market expectations. In it's accompanying statement, the US Federal Open Market Committee (FOMC) signalled no pause in its monetary tightening, suggesting that there was enough inflation to keep US rates on an upward path.

As the week drew to a close, the final punch on the euro came in the form of upbeat US manufacturing data, with the ISM manufacturing index recording an impressive 53.8 in June compared to 51.4 in May.

The news triggered a fresh sell-off in the 12-nation single currency, as the dollar rallied sharply to a new 13-month peak of $ 1.1936 in holiday thinned trading. The move was also supported by a higher reading on the University of Michigan's consumer sentiment measure that came in at 96.0 indicating a rise in optimism amongst US consumers.

A meeting of the heads of state of G8 countries will take centre stage next week, after US President Bush confirmed that currency issues would be a topic, as Chinese President Hu Jintao is expected to meet with other G8 leaders on the first day of the summit.

In addition, the release of US jobs data for June and movements in crude oil prices are likely to provide further direction to the currency markets.

Range for this week: $1.1880-$1.2180

Yen

The Japanese yen remained soft at the start of the week after being pressured by concerns over the sustainability of Japan's fragile economic recovery in the face of rising energy prices.

In addition, the yen was also hurt after China said that it would not bow down into revaluing the peg on its currency. Chinese Premier Wen Jiabao told Asian and European finance ministers that China favoured a flexible currency but would not be rushed into action as much preparation was needed to avoid economic shocks.

As the week progressed, signs of stability in the US economy following healthy economic data and expectations of an interest rate hike by the US Fed kept the dollar well bid as the yen was pushed above the key 110 barrier for the first time since October 2004.

Data showing a fall in Japanese industrial output weighed on the yen, whilst mixed forecasts suggested that the Japanese economy would remain constrained in the months ahead.

The US Fed's decision to increase US interest rates added further pressure on the yen as it was pushed towards 111.00 per dollar, but an upbeat 'Tankan' survey helped keep a check on the yen's losses.

However, the final nail in the coffin came at the close of the week as the dollar staged an 'independence day' rally following robust US manufacturing data, pushing the yen to a fresh 10-month low of 111.79 per dollar.

In the week ahead, developments in Scotland at the meeting of G8 leaders will be closely watched for any signs of a revaluation in the yuan, whilst the Japanese yen is likely to remain under pressure due to concerns over higher crude prices.

Range for this week: Y109.50-Y112.50

Sterling

Sterling commenced the week on the back foot as it remained under pressure due to the possibility of a narrowing in the interest rate differential between the United States and Britain.

Data showing a fall in house prices in England and Wales had little impact on Sterling, which remained steady against the dollar and close to 10-month lows against the euro. As the week progressed, the release of weaker-than-expected CBI retail sales data pushed the pound lower towards $ 1.8000 levels.

The Confederation of British Industry's monthly distributive trades survey showed 42 percent of retailers reporting a decline in sales, giving a balance of -19; the lowest since records began in July 1983.

Meanwhile, a revision of British GDP and consumer confidence data added further pressure on the currency as it was pushed below $ 1.8000 to an 8-month low due to intensified talk of a British rate cut.

The Office of National Statistics said it had revised down GDP growth to just 0.4 pct for the first quarter of 2005, whilst the Gfk consumer confidence measure came in at -3, against median forecasts of -2.

A significant pickup in the UK manufacturing PMI to 49.6 in June from 47.0 in May failed to support Sterling as it was still below the 50-benchmark that separates contraction from growth.

The weekend witnessed yet another aggressive sell-off as a fall in Sterling's yield advantage over the dollar in the light of higher US rates sliced into the British pound, taking it to a 10-month low below $ 1.7700. The Bank of England meets next week and is expected leave interest rates unchanged at 4.75 pct.

Range for this week: $1.7630-$1.7930