13th US rate rise expected (page 1 of 2)

Euro

The U.S dollar started the week under pressure against the euro after its inability in the last three weeks to hit new highs triggered a bout of profit-taking. Market speculation that central banks were bidding for euro's below $1.1700 also helped to lift the euro zone currency.

Moreover, the release of a U.S. service sector report by the Institute for Supply Management in which the non-manufacturing index dropped to 58.5 in November from 60.0 in October failed to support the dollar. The November index was below Wall Street's forecast of 59.0.

The dollar showed little reaction to revised data on U.S. productivity that came in close to expectations, and to a report showing strong U.S. factory orders for October. The Commerce Department stated new orders at U.S. factories rose 2.2 percent in October after a 1.4 percent September drop.

In Europe, a greater-than-expected rise in German Industrial output for October helped boost the euro zone common currency. The German manufacturing orders rose by a bigger-than-expected 2.0 percent in October compared with the previous month.

Furthermore, supporting the euro were comments by European Central Bank chief economist Otmar Issing. He said the ECB did not plan a series of rate hikes, after raising rates to 2.25 percent. However, he added the European Central Bank stood ready to act at any time if price stability were endangered.

By the end of the week the dollar ignored a stronger-than-expected U.S. Consumer Confidence report. The University of Michigan's December U.S. consumer sentiment index was 88.7, up from a November reading of 81.6. Wall Street economists had expected a reading of 85.5.

The coming week will include November retail sales on Tuesday. U.S. international trade deficit for October will be reported on Wednesday. On Thursday, CPI data will be released. This is a widely tracked gauge of inflation at the consumer or retail pricing level.

Data from the Fed on industrial production and capacity utilisation for November, in addition to Net Capital Inflows for October will be released on Thursday.

Range for this week: $1.1670-$1.1970

Yen

At the start of the week, the yen fell to 32-month lows against the U.S. dollar after Japanese officials signalled on the side of the G7 meeting their comfort with its slide.

Japanese Finance Minister Sadakazu Tanigaki stated after the G7 meeting that the yen's fall through 121 to the dollar reflected economic fundamentals. Furthermore, BoJ Governor Toshihiko Fukui said the weaker yen was not a problem and was consistent with the central bank's policy of fostering growth.

The Japanese yen was not a topic at the weekend meeting of finance ministers and central bankers, giving market players more reason to think that the Group of Seven officials have no objection to its weakness.

Meanwhile, the dollar was supported by expectations for further U.S. interest rates hikes, U.S. companies repatriating funds to take advantage of a year-long tax break that expires at the end of December and Japanese investors investing year-end bonuses in foreign assets.

As the week progressed, the yen managed to regain some of its losses versus the dollar after Japanese Prime Minister Junichiro Koizumi repeated it was too early for the Bank of Japan to end its ultra-easy monetary policy, but suggested he might approve of such a move once deflation has ended.

Financial markets expect the Bank of Japan to change its policy sometime in the first half of 2006, although most say the BoJ will likely keep rates pinned near zero for a while longer.