US dollar slides on profit taking

Euro

The US Dollar edged up at the start of the week against the euro, however, its gain was capped as traders were reluctant to make any large currency moves ahead of the Fed's policy meeting. The markets focus was on whether the central bank will signal an imminent end to its 18-month campaign of tightening credit.

As the week progressed, the dollar lost ground against the euro as dealers speculated that the US Federal Open Market Committee would signal that interest rates are close to a peak. Furthermore, euro gained support by the release of the Eurozone Quarter 3 current account deficit which showed a deficit of 5.1 billion better than the previous figure of 13.3 billion.

Towards the middle of the week, the Federal Reserve raised the benchmark federal funds rate for the 13th consecutive time; increased it by 25 basis points to 4.25 percent. Meanwhile, as expected, the fed changed it statement and dropped reference to policy 'accommodation' in its outlook statement hinting that the central bank was nearing the top of its rate tightening cycle.

The dollar extended its losses on data showing the gap between US imports and exports in October widened to a record shortfall of $68.9 billion exceeded economists' expectations of $63 billion. Dollar's slide continued further despite a better than expected U.S. current account deficit of $195.8 billion in the third quarter, against analysts' expectations of a $204.8 billion. Moreover, euro was up after Germany's Ifo business sentiment data rose to 99.6 much better than a forecast of 98.2.

Next week, market would watch the following data out of Europe: October Industrial Production, October Trade Balance and the Current Account Balance. From the US numerous data would be released of which market will be focusing on Core PPI, Jobless Claims, PCE Core Price Index, Durable Goods Orders and New Home Sales.

Range for this week: $1.1700-$1.2150

Yen

At the start of the week, yen was under pressure due to Japanese investors buying foreign high yielding bonds and selling the Japanese currency.

However, soon dollar's luck changed as Japanese consumer confidence for November showed an improvement. Data came in at 48.2 better than previous month's figure of 47.9. Moreover, the yen rallied further especially against the dollar after the Bank of Japan's tankan survey reflected business sentiment had improved in the last quarter.

As the week progressed, Japanese Finance Minister Tanigaki said that he saw 'some movements' in the currency market over the past few days and that his ministry would keep a close watch on the market. He then explained that the yen moves were still 'reflecting fundamentals in the larger sense'.

Another senior finance ministry official said that the yen's move was 'too rapid' and the ministry would watch the market 'with great attention'. Despite the comments, traders are not expecting Japan to intervene in the market at the current levels against the dollar.

Analysts expect strong technical and psychological support for the dollar at 115 yen.
Next week, market will be watching Bank of Japans Monetary Policy meeting minutes and November Trade Balance.

Range for this week: Y114.50-Y122.50

Sterling

At the start of the week, dollar gained against sterling after a series of explosions at a fuel depot north of London. However, the rise was capped after the British police confirmed that the blasts were an accident.

As the week progressed, sterling gained momentum as strong November retail sales data from the UK rose 2.1 percent from a year ago. In addition UK manufacturing sector was also seen rising slightly in December.

The Confederation of British Industry reported net balance of manufacturers improved to -22 percent this month from -25 percent and exceeding expectations of -24 percent. However, sterling failed to hold to its gains as UK inflation data showed a slightly lower rate than expected.

The annual inflation rate declined to 2.1 percent in November, its weakest rate in five months, from 2.3 percent in October, which was less than a forecast of 2.2 percent.

Furthermore, sterling came under pressure after the release of unemployment figure showing a rise for the 10th successive month boosting market's expectations of an interest rate cut. The Office for National Statistics said the average earnings slowed to an annual growth rate of 3.6 percent below analysts forecasts of 3.9 percent.

Towards the end of the week, sterling gained in the absence of any major British data.
Markets are paying close attention to British data, trying to work out whether the Bank of England is going to cut rates a second time after taking them down to 4.50 percent in August. Therefore, minutes from the December meeting will thus be a key focus for next week.

Range for this week: $1.7400-$1.7950