Weaker levels for sterling

Euro

The dollar appreciated against the euro at the start of the week on continuous speculation of interest rates hike in the United States. The Federal Reserve has already raised interest rates at 11 consecutive policy meetings to 3.75 pct.

Minutes released from the Sept 20 meeting of the policy-setting Federal Open Market Committee made clear the Fed's concern with combating inflation and its intention to keep raising the cost of borrowing.

Meanwhile, the euro received a brief boost after news that conservative and economic reformer Angela Merkel will become Germany's new leader. Merkel struck a deal with Chancellor Gerhard Schroeder's Social Democrats, a move seen as ending three weeks of political deadlock after an inconclusive election last month.

However, market enthusiasm about her victory quickly faded after concerns raised that a coalition between Germany's main parties might dilute reforms in Europe's largest economy.

As the week progressed, the dollar extended its rallies against the euro after the U.S. trade deficit for August came in a marginally narrower than forecast and did nothing to shake expectations that interest rates would keep rising.

The U.S. trade shortfall in August widened to $59.0 billion, slightly below expectations of $59.50 billion. On the last trading day the U.S. unit lost ground after the release of a string of U.S. economic data that was generally softer than market forecasts.

U.S. consumer prices, excluding food and energy costs, rose just 0.1 pct in September, compared with market expectations of a 0.2 pct increase. Additionally, U.S. retail sales rose 0.2 pct, below market forecasts of a 0.4 pct rise.

Moreover, U.S. industrial production declined a larger-than-expected 1.3 pct last month, the biggest fall since January 1982, while the University of Michigan's preliminary consumer sentiment index was 75.4, below forecasts of a 80.0 reading.

Next week, market will keep a close eye on the Philadelphia Federal Reserve's manufacturing survey for October, U.S. September leading indicators and will especially scrutinise the language used by a series of Fed speakers, starting with Fed Chairman Alan Greenspan.

Across the Atlantic, euro zone inflation data will be closely watched for clues on the severity of the threat posed by price pressures. October's ZEW business survey will also be a focus point for further clues on the outlook of Germany's economy.

Range for this week: $1.1950-$1.2250

Yen

The Japanese yen was steady at the beginning of the week due to a holiday in Japan. Japanese machinery orders, a key early gauge for capital spending, rose a seasonally adjusted 8.2 pct in August from a month earlier, exceeding a consensus market forecasts for a 2.2 pct gain.

The data fuelled a 2.5 pct rally in the Nikkei share price average but had hardly any impact on the yen. Remarks by U.S. Treasury Secretary John Snow, in Tokyo ahead of his trip to China, calling from more flexibility in the yuan also had negligible impact on the yen.

As widely expected, the Bank of Japan ended a two-day meeting without adjusting its super-loose monetary policy. BoJ Governor Toshihiko Fukui said the chances of an end to the policy would rise over the course of the next financial year.

Range for this week: Y112.50-Y115.50

Sterling

Sterling weakened against the dollar and the euro at the start of the week on worries about the health of the British economy. House price inflation slowed to an annual 2.8 pct in August, the lowest in more than nine years, conflicting signals about inflationary prospects in Britain.

Moreover, the pound extended its losses after data showed Britain's August trade deficit unexpectedly hit a record high because of huge insurance payouts resulting from hurricane Katrina. The Office for National Statistics said the goods and services trade deficit widened to a record 5.3 billion pounds from 3.9 billion in July.

As the week progressed, sterling fell further against the dollar as weak UK labour data showed British claimant count unemployment rose for eight month running in September. Weak UK data raised market expectations that the Bank of England may cut interest rates sooner rather than later.

However, BoE governor Mervyn King said that he could not promise an interest rate cut but said the central bank would not make up its mind until it meets in November. The BoE already cut its base interest rate for the first time in two year in August by a quarter point to 4.5 pct and had held them steady since then.

In the week ahead, markets will be awaiting data released such as third quarter GDP, September consumer prices and retail sales. In addition, the Bank of England also expects to release minutes from its October meeting.

Range for this week: $1.7550-$1.7850