US dollar rises on higher rates

Euro

The dollar hit a two-month high against the euro at the start of the week after Hurricane Rita spared Texas oil refineries, pushing oil prices lower and alleviating worries that lofty energy costs could eat into U.S. consumer spending.

Easing concerns about the U.S. economy convinced markets' participants that the U.S. Federal Reserve will extend its 15-month streak of dollar-supportive interest rate rises. Moreover, Federal Reserve officials signalled that they are not done with their campaign of raising interest rates.

Two Fed officials, Kansas City Fed President Thomas Hoenig and Chicago Fed President Michael Moskow said that the U.S. economy is in good shape despite the double-whammy from hurricanes Katrina and Rita.

Moskow also added that more policy tightening is needed to keep inflation from building, while Hoenig mentioned that the central bank must be sensitive to heightened price pressures.

Meanwhile, San Francisco Fed President Janet Yellen said the Federal Reserve 'must deliver' on its commitment to price stability. She also added that unacceptable rise in inflation is not an option. Yellen's comments overshadowed a report showing a steep fall in US consumer confidence, which came in at 86.6, well below analysts' forecasts of 95.0.

On the other hand, the Federal Reserve president Alan Greenspan said that American households had built up so much equity in their home sales that they could weather a price drop without serious harm. His remarks came as U.S. existing homes in August hit the second highest pace on record at 7.29 million annualised.

As the week progressed, the dollar rallied further against the euro on a series of strong U.S. economic data. U.S. durable goods orders surged 3.3 pct in August from a downwardly revised 5.3 pct decline in July. Meanwhile, Chicago Purchasing Management Index rose to 60.5 in September from 49.2 in August.

In addition, the U.S. government data showed that the number of initial jobless benefit claims fell to 356,000 last week, well below a forecast of 420,000. In Europe, the single currency had a muted reaction to Germany's closely-watched Ifo business climate index that unexpectedly rose to 96.0 in September, an eight month high, from 94.6 in August.

Next week, main market focus will be on U.S. employment report with expectations the U.S. economy may shed jobs in September as Hurricane Katrina shut down oil refineries and forced mass evacuations from the Gulf Coast.

In addition, Surveys of U.S. manufacturing and service sector activity will be closely watch to assess whether the economy is robust enough to warrant further rises in interest rates. In the euro zone, market will watch manufacturing and service sector surveys for clues on the outlook of the European interest rates.

Range for this week: $1.1900-$1.2200

Yen

The dollar was on a firm footing against the yen at the start of the week, supported by speculation of further interest rate hikes in the United States.

As the week advanced, the yen trimmed its losses against the dollar as Japanese stock prices and bond yields surged after a top Bank of Japan official suggested that Japan is closer to ending seven years of deflation and raising its own key interest rate.

Bank of Japan board member Miyako Suda said the central bank is close to scrapping its ultra-easy monetary policy, possibly within the next six months, as seven years of falling prices seem set to end as soon as October.

The Japanese unit was also supported by August retail sales in Japan, which rose 1.5 pct from a year earlier, providing more evidence that consumers are helping the economy make a sustained recovery from deflation. However, The yen's rally against the greenback was short-lived as strong U.S. economic figure pushed the dollar as high as 113.50 yen.

Week ahead, Japan's Tankan quarterly survey of business sentiment will be closely watched for clues on the outlook of Japan's economy.

Range for this week: Y112.00-Y115.00

Sterling

Sterling fell against the dollar at the beginning of the week on expectations of more interest rate hikes by the U.S. Federal Reserve.

Concerns about the British economy also weighed on the pound after the release of a string of British economic data during the week. The Confederation of British Industry's (CBI) distributive trades survey gave a balance of -24 in September, well below the forecast -15 and the fastest annual pace of fall in sales volumes for 22 years.

Meanwhile, Final British GDP data for the second quarter showed annual growth at its weakest rate in 12 years at 1.5 pct, compared with a previous reading of 1.8 pct.

On the last trading, sterling rallied marginally against the dollar, shrugging off weak consumer confidence data as month-end position squaring drove investors to buy back the oversold pound. The GfK consumer confidence index fell to -5 in September from -4 in August, but received limited attention.

Next week, market will focus on a raft of British economic data, such as PMI and Industrial production, for further clues on the outlook of the U.K. economy. Bank of England rate decision will also be closely watched with expectations that BoE may keep its interest rate unchanged at 4.5 pct.

Range for this week: $1.7500-$1.7800