Markets set to push dollar lower

The week ahead will be the busiest of December, with a raft of U.S. and European economic numbers on the calendar. U.S. payroll numbers are sure to take centre stage as markets seek confirmation of a pick up in job creation.

With the dollar's fall against the Japanese yen and euro, analysts said the spectre of currency intervention by Japanese and eurozone authorities has grown.

The markets are in the mood to push the dollar to the pressure points of both the ECB and BOJ. The European Central Bank meets on Thursday and attention will be on euro's export-damaging rise against the dollar.

Euro

The dollar kicked off the week, extending its losses against the euro after a meeting of the Group of 20 rich and developing nations produced no co-ordinated stance to stem the U.S. currency's decline.

The G20 communiqué made no explicit reference to currency swings, although, it called for greater exchange rate flexibility in emerging Asian economies. The dollar continued its decline against the European single currency, pressured by news that Russia may consider boosting the share of euro in its $100 billion-plus foreign currency reserves.

Alexei Ulyukayev, First Deputy Chairman at Russia's central bank, said, 'it is unlikely that the dollar share of reserves will be reviewed. The share of euros may be reviewed, but first we need to undertake analysis.'

Last week, Deputy Chairman Konstantin Korishchenko said the proportion of the euro in the basket that helps to guide the value of the rouble was bigger than many analysts expected.

The Russia development prompted renewed speculation that other nations could do the same in light of the dollar's decline in the past few years and concerns about the U.S. currency account deficit.

Mixed batch of the U.S. economic data did little to ease heavy dollar selling pressure. The University of Michigan's final reading for November of its consumer confidence index was 92.8, up from 91.7 in October but below November's preliminary reading of 95.5.

Analysts on average had forecast the index would rise to 96.0. Meanwhile, U.S. weekly jobless claims shrank by more than expected, however, U.S. durable goods orders unexpectedly slipped 0.4 percent. Non-defence durable goods orders dropped 1.5 percent and orders excluding transportation fell 0.7 percent.

In Europe, Germany's Ifo business climate index fell to its lowest level since September 2003 in November, dropping to 94.1 from 95.3 in October. It surprises that Ifo cites oil as a factor weighing on sentiment given that oil price has already fallen back.

Usually on such a weak number market expects euro to decline but it seems all bad news for Europe is not being seen as bad news for the euro.

As the week was coming to an end, the dollar touched all-time lows of 1.3329 against the euro on comments, later retracted, that China was cutting back on its accumulation of dollar assets.

Chinese business newspaper quoted Yu Yongding, a researcher who is also a member of the central bank's monetary policy committee as saying that China had already begun reducing U.S. dollar assets in its foreign exchange reserves. However, the dollar soon bounced back after the banker quoted in the article issued a statement saying he had, in fact, no knowledge of the central bank's action on reserves.

Meanwhile, European Central Bank Chief Jean-Claude Trichet said the recent moves in the euro/dollar were 'unwelcome' and that it underlined the importance of the U.S. Treasury pursuing its strong dollar policy. According to a proposal debated by European Socialist leaders the euro zone governments should play a role in setting European Central Bank exchange rate policy.

The document also urged the European Commission to put proposals to European Union governments on 'general orientations for exchange rate policy'. The proposal came as the dollar has slumped to record lows against the euro, drawing concern from European exporters.

However, the ECB and markets likely would oppose any potential political interference in an independent Central Bank. The ECB has no exchange rate target that can influence the value of the euro through interest rate policy and market intervention.

Next week financial markets will focus on the U.S. job data, the Institute for Supply Management releases its manufacturing survey on Wednesday, while its non-manufacturing report is out on Friday. The preliminary reading of U.S. GDP in the third quarter and Consumer Confidence are due on Tuesday.

Meanwhile, in euro zone, market will keep a close eye on European Commission's sentiment survey and euro zone consumer price index on Tuesday, followed on Wednesday by euro zone purchasing manager's surveys for the manufacturing sector and on Friday by service sector surveys.

Range for this week: $1.3000-$1.3500

Japanese Yen

Japanese yen commenced the week on a strong foot against the dollar on concerns over the health of the U.S. economy. U.S. President George W. Bush reiterated his support for a strong dollar policy.

Japanese Finance Minister Sadakazu Tanigaki said that he welcomed Bush's reaffirmation of the 'strong dollar' policy and said Japan would act against exchange rate volatility. However, financial markets think the U.S. 'strong dollar' policy is just rhetorical.

Meanwhile, Bank of Japan Governor Toshihiko Fukui said an appreciation in the yen could be destabilising and had the potential to become a 'big concern'. Meanwhile, the yen showed little reaction to slightly better than expected data on Japan's service industries, due to worries that a further rise in the currency could prompt the Japanese authorities to restart dollar-buying intervention.

As the week progressed, yen continued its rally after Japan's trade surplus rose 8.8 percent from a year earlier, with forecast for a rise of 2.8 percent. Meanwhile, Bank of Japan Policy Board member Hidehiko Haru said, he would pay attention to any negative impact from the recent rise in the yen on the economy.

He also added he could not say for sure if Japan would overcome deflation in the fiscal year starting next April, despite the BoJ's forecast of a slight rise in consumer prices in that year.

Recent data on gross domestic product showed the economy was mostly flat in the second and third quarters of this year, as the strong recovery momentum of the previous year wore off. Speculation that China could soon re-value the yuan added more pressure on the dollar. The dollar hit a 4-1/2 year low of 102.12 yen.

Range for this week: 101.00-105.00

Sterling

As the week started, sterling gained on the back of weak dollar despite survey showing the British housing market had slowed sharply. Asking prices for British homes fell 1.7 percent in the month to mid-November, compared with a 0.6 percent gain in the prior period, according to property website Rightmove.

Sterling's gain came after recent weakness inspired by soft UK economic data, including slack housing market data and weaker-than-expected retail sales figures, reinforcing expectation that interest rates have peaked at 4.75 percent.

As the week progressed, sterling hit a nine-month high against the struggling dollar and held virtually steady versus the euro tracking the greenback's board weakness and brushing aside a recent batch of soft UK economic data.

Rachel Lomax, deputy governor of the Bank of England, said in a speech that the UK economy probably grew a bit faster than the 0.4 percent reported in the first official growth estimate for the third quarter. She said some business surveys suggested the manufacturing sector was still growing and so the economy was doing better than initially thought.

Next week markets will focus on the testimony of Bank of England Monetary Policy Committee members to a parliamentary committee on Tuesday and the Government's pre-budget report on Thursday. The Organisation for Economic Co-operation and Development (OECD) releases its semi-annual Economic Outlook on Tuesday.

Range for this week: $1.8700-$1.9200