US dollar still in favour

Euro

The dollar stared the week on a firm note against the euro on continued speculation that U.S. interest rates will remain more attractive than those in Europe. Though the European central bank may raise its interest rates soon, the rate differential still tilted heavily in favour of the U.S. currency.

Over the week, the euro was bolstered marginally by comments from ECB policymakers that signalled the central bank could raise rates sooner rather than later. Bank of France governor Christian Noyer said that there was a need to keep down inflation and inflationary expectations in the euro zone on concerns over rising energy prices.

Noyar's views were echoed by ECB Governing Council Member Klaus Liebscher who said the central bank should act before inflationary risks results in widespread price rises materialising. ECB Chairman Jean-Claude Trichet also indicated the likelihood of an interest rate hike in the euro zone.

Mid week, Ben Bernanke's first round of testimony reinforced the market's view that the Fed would keep raising interest rates. Bernanke stated that he would carry on with the policies of Alan Greenspan, the Fed chief for nearly two decades who is set to retire on January 31.

As the week progressed, the single currency lost ground after a survey by the German ZEW institute showed investors sentiment in the euro zone's biggest economy unexpectedly deteriorated in November. ZEW said its German economic expectations indicator slipped to 38.7 in November from 39.4 in October.

On the other hand, euro hardly reacted to a report showing euro zone economic growth grew to 0.6 pct in the third quarter from the previous quarter.

Close to the weekend, the dollar extended its rally against the euro on strong U.S. economic data. Net flows of foreign capital into U.S. assets surged to a record $101.9 billion in September, well above expectations and more than enough to cover a record trade deficit of $66.1 billion that month.

Moreover, U.S. consumer price index rose 0.2 pct in October, despite a dip in energy prices as housing costs notched the largest increase in nearly five years.

Next week, markets will keep a close eye on the ECB's monetary outlook, as well as growth, inflation and sentiment data to gauge the health of the euro zone economy and for clues on how far the ECB is likely to take monetary tightening.

On the other side of the Atlantic, the release of the minutes from the U.S. Federal Reserve's Nov. 1 meeting and the University of Michigan sentiment for November will be closely watched.

Range for this week: $1.1620-$1.1920

Yen

The Japanese yen commenced the week on the note finding support from a report showing Japan's current account surplus rose 6.5 pct in September from the same month a year earlier, beating forecasts for a modest fall.

Later in the week the yen trimmed its rallies against the dollar after Japanese Prime Minister Junichiro Koizumi made a rare comment on central bank policy, saying it was too early for the Bank of Japan to end its ultra-loose quantitative easing until deflation is defeated.

Koizumi's remarks added to a chorus of government officials calling for the BoJ, which gained political independence just in 1998, to work with the government in fighting deflation. As the week advanced, the yen remained on the back foot even after comments from Bank of Japan Governor Toshihiko Fukui, who reiterated the chance was growing that the central bank would alter policy in the fiscal year from April 2006.

Fukui's comments came after a two-day meeting at which the central bank kept its ultra-loose policy unchanged, as expected, and said it saw consumer prices rising by the year end, after around seven years of stubborn deflation.

Range for this week: Y117.50-Y120.50

Sterling

At the start of the week, sterling fell against the dollar on weak U.K. economic data. British producer prices rose 2.6 pct year-on-year in October, weaker than market expectations of 2.9 pct, the weakest reading since June.

On a month-on-month basis, prices tumbled 0.1 pct against a rise of 0.7 pct in September. In addition, UK consumer price inflation slipped 2.3 pct in October from a record of 2.5 pct the previous month.

As the week advanced, the pound extended its losses and fell to a two-year low against the greenback after a dovish Bank of England inflation outlook. The BoE's quarterly inflation report, said inflation would meet its 2.0 pct target in two years, re-opening debate on the possibility of a rate cut.

Meanwhile, Bank of England Governor Mervyn King, speaking on the inflation report, stated the bank did not anticipate future decisions. He also added that there was no reason to expect a sharp rise in sterling against the euro.

In the week ahead, markets will watch the Bank of England's Monetary Policy Committee publishing its minutes for November for further clues on the outlook of the British interest rates.

Range for this week: $1.7000-$1.7300