Dollar ends on higher note

Euro

At the start of the week, dollar depreciated after tame US inflation data and weak growth figures have prompted traders to unwind their dollar positions. Core consumer prices rose 0.1 percent while market expectations was for a 0.2 percent rise. US industrial production figures were also disappointing falling to 1.3 percent in September.

However, as the week progressed, the dollar gained due to market's continual focus on expectations of US interest rates increases ignoring soft data released for the New York State manufacturers' number.

Adding further to the weakness was the release of US data which showed a sharp increase in US producer prices as well as strong foreign demand for US securities. US producer prices jumped 1.9 percent, well above the 1.1 percent forecasted by economists.

Meanwhile the capital inflow number came in at $91.3 billion, significantly higher than the same month's $59 billion trade deficit reported last week.

The euro found little support from data showing the German ZEW research institute's measure of investor confidence rose slightly in October, boosted by lower oil prices but held back by worries over economic reform.

However, midweek the dollar fell as the market began selling dollars as investors considered the outlook for interest rates was priced into the US currency. Also released was the Fed's beige book, which showed that business activity increased in September and early October and the US housing starts data, which came in higher than expected by 3.4% but had no major impact on the dollar.

By the end of the week, the dollar gained some footing as expectations continued to mount for higher US interest rates due to inflationary pressures in the US economy, which would give the dollar a yield advantage over other currencies.

Meanwhile within the euro zone, Otmar Issing, chief economist of the European Central Bank, said that central banks have to be extremely vigilant against inflation, sparking speculation that ECB may raise rates sooner than later.

Next week, market will keep a close watch on US growth and euro zone inflation data. Euro zone inflation data due on Friday is expected to show a figure of 2.4 percent from October 2004, which is still above the central bank's comfort zone raising the prospect that the ECB will raise rates sooner than later.

Range for this week: $1.1800-$1.2300

Yen

The week started with a relatively stronger yen which was supported by the previous week's release of disappointing US data. However, as the week progressed, the Japanese currency came under particular pressure with portfolio managers and investment trusts moving funds from Japan into overseas bonds.

As the PPI and capital flows data were released, the dollar was further supported against the yen, reaffirming a strong foreign demand for US securities. The combined factors of rising US interest rates as well as the Japanese investor demand for higher-yielding foreign bonds has pushed the dollar up against yen, trading level 116.00 yen to the dollar during the week.

The yen was further hurt due to a renewed surge in US crude oil prices above $64 a barrel as another tropical storm Wilma approached the US coast. The storm gained strength in the Caribbean Sea but shifted its expected path to the east towards Florida, making it less of a threat to US oil and gas operations.

Next week, investors will keep a close watch on the release of inflation data out of Japan as the market gauges the health of the economy.

Range for this week: Y112.50-Y116.50

Sterling

This week markets have been eager to get clues on whether or not the Bank of England will cut interest rates.

At the start of the week, sterling gained against the dollar after weak US data pressured a sell off of the greenback. As the week progressed, sterling weakened against the dollar as data showed that British house prices rose for the first time since June between mid-September and mid-October.

Furthermore, a lower than expected rise in Britain's consumer prices pushed the pound lower against the dollar as it indicated inflation was less of a barrier to a possible interest rate cut in coming months. Consumer prices rose to 2.5 percent against a forecast of 2.7 percent.

Moreover, Bank of England MPC member Rachel Lomax said British inflation is likely to remain above target for the next few months but the outlook for domestic economy was less rosy. Investors are chasing the dollar higher due to expectations of higher US interest rates while market speculation of a rate cut in Britain is eroding the sterling's yield advantage.

However, sterling gained slightly as minutes of the Bank of England's October policy meeting and remarks from a top policymaker suggested a rate cut was unlikely, remaining at 4.5 percent. At the end of the week the UK GDP data was in line with expectation at 0.4 percent.

Next week the market will focus on a number of speakers who will appear before the House of Lords Economic Affairs Committee on Tuesday.

Range for this week: $1.7350-$1.7900