Euro slipped against the dollar

Euro

Earlier on in the week the euro slipped against the dollar as a stronger then expected non-farm payroll figure painted a brighter picture of the US economy and dampened down concerns over a slowdown in the US labour market.

However, the dollar rally was short lived as the greenback slipped against most of the major currencies amidst concerns that the US could not sustain their current economic growth following last week's break of key technical barriers.

By early mid-week the greenback had appreciated, recovering from a two month low against the euro as investors adjusted their positions while waiting for the US Fed policy makers to decide on US rates. The market was widely expecting a hike of 25 basis points, and was focusing more on bullish statements specifically made as to the future of US interest rates. As expected the US central bank raised the benchmark fed funds rate by 25 basis points to 3.5 percent, bringing the total rate hikes to 2.5 percent since the beginning of the current tightening campaign that started in June 2004.

The Fed stated that long-term inflation pressures remained well contained and reiterated their intention to remove monetary tightening at a measured pace and acknowledged that spending had strengthened since the last meeting in June. However, the market was expecting more hawkish comments on inflation, which resulted in a stronger euro.

Later on in the week, dollar pressure continued as the euro edged up against the dollar testing a two-month peak at $1.2485 levels. On the economic front, the US retail sales figure rose 1.8 percent last month led by the biggest gain in auto sales since the terror attacks of September 11th. This figure was insufficient to resuscitate the greenback, which extended its losses after the figure was released as the market had forecasted a 2.2 percent gain.

The dollar however rebounded on Friday amid a swift round of profit-taking, recovering from a modest slip after data showed that U.S. trade deficit for June widened to $58.8 billion, the third largest on record, from $55.4 billion in may. The huge trade deficit, a persistent pressure on the dollar over the past three years, has re-emerged as a factor weighing more heavily on the U.S. currency since China revalued its yuan currency in July.

In the coming week, the market will pay close attention to capital flows data for July due to be released on Monday for clues on how well the United States is attracting overseas investment to finance its massive current account deficit.

Meanwhile, the U.S. consumer price index for July, due on Tuesday, is expected to show core prices, which exclude volatile energy prices, rose 0.2 percent in July compared with 0.1 percent in June. The Producer price numbers for the same month is expected on Wednesday. Consumer inflation data for July will be the week's main eurozone release. The data is due on Thursday and is expected to show prices were unchanged from June and rose 2.2 percent on the year.

Range for this week: $ 1.2250 - $ 1.2550 (AED 4.4994 - AED 4.6096)

Japanese Yen

The yen commenced the week on unsure footing as a crucial Japanese parliament vote on postal reforms was seen as a major hurdle towards the success of Prime Minister Koizumi's government. However, news of a rejection in the postal reform bills, but the decision by the Prime Minister to dissolve the lower house and a call for fresh elections helped trigger a turnaround in the currency's fortunes as investors took heart from the improving economic situation in Japan.

Meanwhile, the yen edged higher after the Federal Reserve raised interest rates as expected, but the accompanying statement released disappointed traders who were expecting a more hawkish stance on inflation.
The yen's rally continued as foreign investors capitalised on a bull run in the Japanese Nikkei stock index, that rose 1.5 percent to a 15- month high amidst signs of significant improvement in the country's economic outlook. At the end of the week the yen was trading at 109.30 as foreign investors flocked to buy Tokyo shares.

This helped drive major indexes to four-year highs on optimism about growth in Japan. Furthermore, Prime Minister Koizumi's growing public support in polls since calling for fresh elections has assured investors that he is strengthening his stand, following the defeat of the postal reform bill earlier on in the week. In addition, talk of Japanese investors preparing to repatriate coupon payments on U.S. Treasuries also helped propel the yen higher. The coupon payments will be made on August 15.

Range for this week: Y 108.00 - Y 111.00 (AED 0.033090 - AED 0.034009)

Sterling

The week started with a slightly weaker sterling against the dollar, which was supported by expectations of more rate hikes given the healthy pace of economic growth in the U.S. and expectations of higher inflation supported by record high oil prices.

However, this gain was short lived as sterling took the lead in hammering the dollar lower after a better then expected reading in British producer prices. The office for National Statistics said producer input prices rose a seasonally adjusted 1.8- percent last month, against expectations for a rise of 1.5 percent on the month. The pound was also supported by data, which showed Britain's goods trade deficit with the rest of the world narrowed sharply in June.

Sterling hit a six week high against the dollar after the Bank of England suggested that it was in no rush to cut interest rates again after lowering the cost of borrowing to 4.5 percent last week. The BoE said in its quarterly inflation report that the economic growth outlook in Britain had weakened slightly in the near term but inflation was seen moving above its two- percent target.

Investors will look forward to a raft of UK economic data in the coming week, including retail sales, consumer prices and unemployment numbers for clues on the direction of U.K. interest rates.

Range for this week: $ 1.8000 - $ 1.8300 (AED 6.6114 - AED 6.7215)