Sterling continue its decline

Worries about the U.S current account deficit has weighed on the dollar in the three years leading up to 2004 but expectations for higher interest rates have offset such concerns.

After the latest events in London, markets are moving increasingly towards the likelihood of a UK interest rate cut given the potential impact on consumer and business sentiment.

Euro

The European single currency started the week under pressure against the dollar after strong U.S manufacturing data last week cemented expectations for the Federal Reserve to keep raising interest rates.

Furthermore, Europe's straggling economy and political upheaval have prompted investors to bail out of the single currency. In addition, comments from a European Central Bank official re-ignited investors' fears about future stability of the euro zone. ECB Governing Council member Christian Noyer highlighted these concerns after he said it was possible for a country to leave the single currency block.

As the week progressed, a report showing the U.S service sector was stronger than expected boosted the dollar against the euro. The Institute for Supply Management's non-manufacturing index for June was 62.2, above economists' forecasts of 58.0.

Meanwhile, the European Central Bank kept interest rates on hold at 2 percent as expected. Politicians have been pressing the ECB for a rate cut to help economic growth. The weakening of the euro against the dollar brightened prospects for the export sector, however, consumer sentiment remained low and some members of the European Parliament criticised the ECB for paying too much attention to inflation and too little to growth.

At the end of the week, the dollar pared its gains against the euro, despite a fairly solid monthly U.S jobs report, as market sentiment remained cautious in the wake of Thursday's deadly blasts in London. In June, U.S non-farm payrolls rose by 146,000 below economists' forecasts for 188,500 new jobs. The unemployment rate was 5.0 percent, compared with forecast of 5.1 percent. However, upward revisions to the April and May jobs numbers to 292,000 and 104,000 boosted the two-month count by 44,000.

In the coming week, U.S June consumer prices and retail sales, the Empire State manufacturing survey and a preliminary reading on the University of Michigan consumer confidence for July are the focus of attention. In Euroland, finance ministers are meeting in Brussels. They are expected to step up their pressure on the European Central Bank to cut interest rates.

Range for this week: $1.1820-$1.2120

Japanese Yen

The Japanese yen commenced the week on the back foot against the dollar. The dollar continued its rally against the yen as oil prices climbed to a record high, weighing on the outlook of Japan's fragile economic recovery due to its total reliance on imports for its oil needs and the possible harm that soaring crude prices could cause to its economy.

The markets were waiting for the summit of leaders for the Group of Eight nations, which was expected to raise the question of the yuan's revaluation. Most analysts expect China to loosen the yuan's tight peg to the dollar by the end of this year. It is widely expected that the move would buoy other Asian currencies including the yen, as countries would likely give up dollar-buying intervention to keep their exports competitive.

However, Chinese President Hu Jintao made no reference to his country's currency in an address to the G8 rich nations. Meanwhile, Deputy German economy minister Bernd Pfaffenbach said that currency rates had not been discussed at the meeting.

He added however that one of the member countries had 'mentioned the wish for more flexible exchange rates on Asian currencies'. At the end of the week, the dollar climbed to fresh 14-months high of 112.60 against the yen as weak domestic machinery orders data weighted on the yen. Bank of Japan is expected to leave its ultra-easy policy unchanged when it meets next week.

Range for this week: Y110.65-Y113.65

Sterling

At the start of the week sterling was weak as speculation was growing that the Bank of England could cut rates in the medium term to shore up its sluggish economy. Data showing Britain's dominant service sector grew faster than expected in June failed to support the sterling. The index of service sector activity rose to 55.8 in June from 55.1 in May.

As the week progressed, the data from British Retail Consortium also failed to provide a support to the pound, showing sales falling at their slowest annual rate in three months in June as good weather and discounting lured consumers back to the shops. Meanwhile, U.K industrial production data showed British manufacturing output falling at its sharpest quarterly pace in nearly three years in May, added further pressure on the currency.

The Bank of England kept its interest rates unchanged at 4.75 percent. However, sterling continued its decline to 19-months low against the dollar after a series of explosions hit London's transport system causing injuries and some fatalities. Sterling has fallen more than 5 percent in the past two weeks with the fallout of the blasts adding to speculation of an interest rate cut.

Next week, main markets' focus will be on British producer prices data, consumer inflation figures, jobs report and official house prices data.

Range for this week: $1.7237-$1.7537