US dollar pushes higher

Euro

The European single currency rallied against the dollar at the start of the week after Luxembourg approved the European Union's constitution by a solid majority in a referendum.

The Luxembourg's approval came after the rejections in France and the Netherlands that raised doubts about the strength of monetary union in the euro zone. The approval averted the threat of Prime Minister Jean-Claude Juncker's resignation.

The euro also got a boost after European Central Bank Governing Council member Nicholas Garganas stated that surging oil prices might force the bank to raise its inflation forecast, dampening some market expectations for an interest rate cut in the euro zone.

Meanwhile, ECB Governing Council member John Hurley said that the euro zone economic growth is expected to slow this year but interest rates remain at an appropriate level.

As the week progressed, the euro reversed its gains against the dollar after the latest U.S. trade data and White House budget forecasts suggested the 'twin' current account and budget deficits are being reigned in.

The U.S. trade deficit shrank to $55.35 billion in May versus market forecasts of $57 billion. Meanwhile, the White House cut its budget deficit forecast for the fiscal year 2005 by almost $100 billion to $333 billion, as stronger economic growth boosted incoming tax receipts.

Moreover, the dollar extended its rallies on another batch of robust U.S. economic data that underscored the U.S. economic strength and underpinned expectations that the Federal Reserve will continue to hike interest rates.

U.S. retail sales rose 1.7 pct in June above forecasts of 1.0 pct rise and the New York Federal Reserve Bank index surged to +23.91 in July from a revised 10.49 in June.

U.S. industrial production grew 0.9 pct, the biggest jump since February last year, and the University of Michigan consumer sentiment index came in at 96.5 higher than market expectations of a reading of 95. However, U.S. consumer prices and producer prices were unchanged compared with market forecasts.

Next week, the market will focus on the Federal Reserve Chairman Alan Greenspan's semi-annual testimony on the U.S. economy to Congress. The U.S. May net capital inflows data will also be closely watched. In the euro zone attention will be focus on the German ZEW business confidence survey.

Range for this week: $1.1900-$1.2200

Japanese Yen

The yen started the week at a firm note supported by higher Tokyo stock prices and Japanese exporters' selling of the dollar to convert overseas profits to the Japanese currency.

As the week advanced, the yen tumbled against the dollar after the U.S. trade deficit came in better than market expectations. The Bank of Japan, as expected, said it would stick to its ultra-loose monetary policy as most of its board views any change as premature. The decision had little impact on the Japanese currency.

On the last trading day, the Financial Times reported that the Bush administration had told two key senators that it expects China to revalue the yuan in August before President Hu Jintao visits Washington in September.

The yen barely reacted to the news. Chinese officials have stressed they will not yield to foreign pressure and would loosen the yuan's 8.28 peg to the dollar when they are ready. Meanwhile, U.S. officials have griped that the peg keeps China's exports artificially cheap.

Range for this week: Y110.50-Y113.50

Sterling

At the beginning of the week, sterling rose marginally against the dollar after the weekend passed without further incident and on views that the British authorities had done a good job handling the aftermath of the blast in which at least 49 people were killed.

Later in the week, the pound lost ground as a slightly bigger than expected British trade deficit and stronger than expected June producer price inflation data did not alter market expectations of an interest rate cut.

The office for National Statistics said Britain's global goods trade deficit narrowed to 4.962 billion pounds in May from 5.132 billion pounds in April. Meanwhile, British producer input prices rose a seasonally adjusted 2.1 pct last month against analysts' forecasts of 1.9 pct rise.

Moreover, consumer prices remained flat month-on-month in June but yearly inflation rose to 2.0 pct to hit the Bank of England's target, up from 1.9 pct in May. The BoE is widely expected to cut rates, perhaps next month, after leaving the cost of borrowing steady at 4.75 pct at the start of this month.

In the week ahead minutes from the Bank of England's July interest rate meeting will be the major source of attraction, for further clues on the outlook of the British interest rates.

Range for this week: $1.7350-$1.7650