Ignore negatives, ride positives

The yen enjoyed a brief moment of joy at the onset supported by an unexpected landslide win for the ruling LDP, but later joined other major currencies at the lower end of recently traded ranges.

Meanwhile, gold seen as a hedge against inflation and economic uncertainty; cantered to a fresh 17-year high of $ 460.10 and looks set to rally further in the weeks ahead.

Euro

The euro commenced the week on the defensive after being pressured by concerns over the outcome of today's German elections, whilst the dollar remained well supported due to expectations of another yield-boosting US rate hike.

The single currency that ended the previous week above $ 1.2400; fell sharply at the onset of trading to settle around $1.2280, perilously close to major technical support at $ 1.2260.

With market attention shifting towards the upcoming US Federal Open Market Committee meeting next week, the release of key inflationary data during the week was likely to add direction to an otherwise sombre market lacking any direction.

First on the list - the August US producer price index, recorded a 0.6 pct rise, but the core index, which excludes volatile food and energy prices remained unchanged from July. However, the euro failed to capitalise as the release of a narrower-than-expected US trade deficit number for July, helped erase the build up of negative dollar sentiment.

Meanwhile, the release of US retail sales that dropped by 2.1 in August, was again treated with caution as a close look revealed that the drop was largely due to fluctuations in auto sales as the core number that excludes autos grew a healthy 1.0 pct.

The number added momentum to the greenback, as the euro slipped through key support levels to test a low of $ 1.2189.

As the week progressed, the US released its Consumer Price Index - showing a rise of 0.5 pct, against forecasts of 0.6 pct, but the core index which excludes volatile food and energy recorded only a 0.1 pct gain, slightly below forecasts of 0.2 pct.

The data failed to dent the dollar, as it remained firm drawing support from talk of further monetary tightening in the United States.

In other US data, the Philly Fed index of business sentiment dropped sharply to 2.2 against forecasts of 14.0, whilst the NY Fed's index on manufacturing activity came in line with expectations at 16.97.

As the week drew to a close the US recorded that its current account deficit grew in the second quarter of 2005 to $ 195.66 Billion, against expectations of $ 193 Billion, but the negative impact was again erased by a higher-than-expected flow of Capital in to the United States in July.

Net inflow of Capital into US securities stood at $ 87.4 Billion in July, much higher than the trade deficit of $ 57.9 for the same month.

The markets were also given an initial feel of how US consumers felt in the aftermath of Hurricane Katrina as the University of Michigan's consumer sentiment index dropped to 76.9, below forecasts for 85.0. The survey reflected responses gathered after Hurricane Katrina devastated parts of the US gulf coast.

Next week, the US Fed will hog the limelight as they meet to decide on monetary policy and is widely expected to raise the benchmark rate US Fed Funds rate by 25 basis points to 3.75 pct.

The statement that follows will receive close attention from market players on lookout for the Fed's assessment of the economic impact of Hurricane Katrina and the future of US interest rates.

Range for this week: $1.2100-$1.2400

Yen

The Japanese yen opened on an upbeat mood, as currency markets greeted Prime Minister Koizumi's win in the lower house of Parliament with a positive attitude as analysts said that Japan stood a greater chance of pushing forward with much needed political reforms.

The yen sprinted to 109.16 per dollar in early trading supported by the election results, but most of its gains deteriorated during the course of the day as the greenback staged a broad rally on expectations of further rate hikes.

As the week progressed, data showing continued economic expansion in the United States kept the greenback supported as it nudged higher pushing the yen lower towards 111.00 per dollar.

Japan will be closed for trading on Monday and Friday, in lieu of 'Respect for the Aged Day' and 'Autumn Equinox' respectively.

Range for this week: Y109.00-Y112.00

Sterling

England commenced the week on a joyous note, after its Cricket team beat Australia to bring home the 'Ashes' after a break of 16 years.

Sterling went through mixed fortunes as it climbed to a 2 ½ high against the euro, but slipped against a rejuvenated greenback. The Pound was also put under pressure by British producer prices that shrank in August, indicating that there were no inflationary pressures in the UK.

However, the release of the British consumer price index which came in line with expectations above the Bank of England's target of 2.0 pct - following surging fuel costs, helped ease speculation of another rate cut by the authorities.

As the week progressed, Sterling experienced a roller-coaster ride following UK data that showed growth in earnings but a slowdown in retail sales eventually falling to end the week around $ 1.8100 levels.

Sterling is likely to remain under pressure in the week ahead, as talk of a further rate cut gathers momentum following this week's batch of economic data.

Range for this week: $1.8000-$1.8300