Dollar at a three-month high

Euro

At the start of the week, the dollar extended its rallies, striking a three-month high against the euro supported by expectations of more interest rate increases in U.S. Atlanta Fed President Jack Guynn said the Fed's credit tightening campaign still has "a ways to go" before completion.

Meanwhile, the Institute for Supply Management said its index of national factory activity rose to 59.4 in September from 53.6 in August, outstripping economist's median forecast for a drop to 52.0. A spike high in the ISM's price paid component in the data that fanned more concerns about inflation accelerating.

The European single currency was little moved after data showed eurozone-manufacturing business grew faster in September and that the sector is running into capacity constrains. The dollar continued its bullish tone against the euro as more Federal Reserve officials made clear the U.S. interest rates are heading higher.

Philadelphia Fed President Anthony Santomero said the Fed was somewhat more worried about inflation compared with a year ago. Dallas Fed President Richard Fisher said core consumer price inflation was running at the upper end of the Fed's tolerance zone and "show little inclination to go in the other direction".

Furthermore, August U.S. factory orders rose by a higher-than-expected 2.5 percent, recovering from a revised 2.5 percent decline in July.

As the week progressed, the dollar came under pressure after the Institute for Supply Management's (ISM) services index fell to 53.3 in September from 65.0 in August, well short of Wall Street's median forecast for a drop to 61.0.

In addition, recent news that Venezuela had reduced the amount of U.S. Treasury bonds in its international reserves also weighed on the dollar.

The European Central Bank left its key rate unchanged at 2.0 percent as expected, however, its President Jean-Claude Trichet said that strong vigilance against inflation was essential and the central bank was ready to raise rates should problems worsen.

Meanwhile, growing hopes that German Chancellor Gerhard Schroeder's Social Democrats and Angela Merkel's conservative Christian Democrats are finally moving towards forming a "ground coalition" also helped the euro.

Close to the weekend, dollar managed to trim some of its loss against the euro after a report showed the U.S. economy lost fewer jobs than expected in September. The U.S. economy shed 35,000 jobs, as hiring in some regions was offset by layoffs stemming from the damage caused by Hurricane Katrina.

According to the Labour Department the national unemployment rate kicked up to 5.1 percent from 4.9 percent in August. Meanwhile, the Labour Department revised up its estimates for job growth in July and August by a combined 77,000. Furthermore, U.S. Treasury Secretary John Snow said he expects improved payrolls numbers for October.

Next week, Markets will focus on the U.S. consumer price inflation data with expectations of higher headline and core numbers, which are likely to have been boosted by rising gasoline prices.

Other key data out of U.S. include trade balance and retail sales. In Europe, the key data that will be closely watched are French consumer price inflation and the euro zone's second estimate of the April-June gross domestic product.

Range for this week: $1.1980-$1.2280

Yen

Japanese yen started the week on a soft tone against the dollar on a slightly disappointing survey of corporate sentiment.

The Bank of Japan's quarterly Tankan survey of business confidence was plus 19 for September, up from the June survey but slightly below financial market's expectations for a reading of plus 20.

Meanwhile, Bank of Japan Governor Toshihiko Fukui said the central bank could not keep its super-loose monetary policy in place forever; however, he added any shift in the policy would not be rushed.

His comments came as speculation mounted that the central bank would soon end its four-year-old "quantitative easing" policy of flooding the banking system with excess cash as consumer prices recover from seven years of deflation.

The BoJ has pledged to maintain the policy until the core consumer price index, which excludes volatile fresh-good costs, shows a consistent rising trend.

Japan will be closed on Monday for Health-Sports day. On Tuesday Bank of Japan will start its two day meeting.

Range for this week: Y112.25-Y115.25

Sterling

Sterling started the week under pressure against the dollar and ignored the survey showing British manufacturing activity unexpectedly expanded at its fastest pace in six months in September.

The Chartered Institute of Purchasing and Supply/RBS purchasing managers' index rose to 51.5, the highest since March, from 50.3 in August. The forecast was for a fall to 50.

As the week progressed sterling recovered from a two-month low against the dollar as the U.S. currency succumbed to some mild profit taking after the recent rally. British service sector came in line with market expectations.

The Chartered Institute of Purchasing and Supply/RBS said its services Business Activity Index fell to 55.0 last month from 55.2 in August. As expected the Bank of England left interest rates unchanged at 4.5 percent.

Most economists expect the Bank of England to cut interest rates again to spur growth. Sterling failed to hold to its gains against the dollar after the release of weaker than expected U.K manufacturing data.

Manufacturing output fell 0.2 percent in August, compared with expectations for a 0.1 percent rise, the first monthly fall since March.

Range for this week: $1.7455-$1.7755