Fed rate rise boosts dollar

Euro

The European single currency fell against the dollar at the start of the week on expectations that the Fed will continue to hike its interest rates. The Federal Reserve already raised its rates at the beginning of this month to 4%, for the 12th straight meeting and suggested it would keep raising at a measured pace.

St Louis Federal Reserve Bank President William Poole said the Fed's statement after last week's policy meeting suggested there was 'more to come' on rates increases and that further tightening would depend on economic data.

He also mentioned that U.S. growth was strong but inflation was a threat and central bank must act against that risk. Social unrest in Paris and worries that riots in France might spread to other parts of Europe weighed on the euro. Rioters fired shots at police and set hundreds of cars ablaze in France.

Moreover, the euro's decline was accelerated by talk that U.S. companies are repatriating big amounts of overseas earnings, especially from Europe, to take advantage of a special tax break that expires at year-end under the Homeland Investment Act.

As the week advanced, the market shrugged off upbeat comments from top European Central Bank officials. President Jean-Claude Trichet stated the ECB was poised to raise rates at any time to head off inflation risks.

Meanwhile, chief economist Otmar Issing was quoted by German newspapers as saying nearly the same thing. The dollar extended its rallies against the euro despite the fact that the U.S. trade deficit widened to a record of $66.1 billion in September, much bigger than forecasts.

Inflation data will be the market's top focus on both sides of the Atlantic next week, for further clues on the outlook of the U.S. and euro zone interest rates. Moreover, U.S. net capital inflow data and euro zone growth data will be closely watched.

Range for this week: $1.1580-$1.1880

Yen

The dollar started the week hovering near two-year peak versus the yen on expectations that United States may further increase its interest rates.

Bank of Japan Governor Toshihiko Fukui said a change in the bank's monetary policy is possible next year but such a move is not yet on the central banks' radar. The yen showed little reaction to his remarks.

The Japanese unit hardly reacted to the U.S. President George W. Bush's call for China to do more to allow the yuan to appreciate, saying the trade imbalance between the two countries was 'bothersome'.

On the last trading day, the yen rallied briefly against the dollar as Japan's economy grew slightly more than expected in the third quarter, posting 1.7 pct growth annualised compared with forecasts of 1.2 pct.

In the week ahead, market will keep a close eye on the Bank of Japan Monetary Policy meeting and The Asia-Pacific Economic Co-operation summit in South Korea with U.S. President George W. Bush in attendance.

Range for this week: Y116.50-Y119.50

Sterling

Sterling tumbled against the dollar as the U.S. currency continued its broad-based rally, and after news of an unexpected fall in British factory output in September.

The Office for National Statistics said that manufacturing output fell 0.3 pct, the biggest drop since March and below markets' forecasts of a rise of 0.3 pct. British industrial production was also weaker than expected, rising by just 0.5 pct, with expectations of a increase of 0.8 pct.

As the week progressed, the pound slipped further after Britain's trade deficit with the rest of the world narrowed to 5.44 billion pounds in September from 5.9 billion in August and with forecasts of a 5.3 billion pounds deficit.

Sterling was also weighed by news that Britain's Tony Blair suffered his first major parliamentary defeat as prime minister over plans to let police hold terrorist suspects for up to 90 days without charge. Then Bank of England, as expected, left its interest rates unchanged at 4.5% for the third month running.

Next week, market will watch the release of UK inflation and retail sales data for more clues on the UK interest rate outlook.

Range for this week: $1.7270-$1.7570