US dollar in sharp rally

Euro

The dollar started the week with firm note ahead of the US Federal Reserve meeting and with speculation that the US officials may use more aggressive language on interest rates.

The dollar also received further boost against the euro by remarks from European officials warning against excessive strength of the single currency. German Chancellor Gerhard Schroeder stated in interview with German n-tv television that he would push for a strong dollar.

Mid week, as expected, the Fed hiked its interest rates to 2.75 pct, the seventh straight 25 basis points rise. The move, meanwhile, took the U.S. interest rates further above the euro zone interest rates that stands at 2 pct.

The Federal Reserve also signalled that it might raise the interest rates more aggressively to counter any acceleration in inflation although the Fed repeated it would likely remain "measured" in lifting rates.

Moreover, string of U.S. data indicated that inflation has picked up and signalled a more aggressive monetary tightening ahead. U.S. producer prices increased 0.4 pct in February, compared with economists' forecasts of a 0.3 pct rise.

Meanwhile, U.S. consumer prices index rose 0.4 pct in February against market's expectations for an increase of 0.3 pct. On the other hand, the dollar hardly reacted to U.S. durable goods orders that surged 0.3 pct in February, below economists' forecast of a 1.0 pct rise.

In Europe, the Munich-based German Ifo economic research institute said that its closely-watched business climate index declined to 94.0 from a downwardly revised 95.4 in February. The report supported the greenback against the euro.

Ifo President Hans-Werner Sinn said evidence had mounted that economic growth in Europe's biggest economy is likely to slow in coming months. As the week progressed, currency trading stared to be thin due to the Easter Holiday in most of Europe and United States.

Week ahead, market will keep a close eye on job data, manufacturing data and a final reading of GDP in the United States, for clues on how fast the Federal Reserve would raise its interest rates to counter inflation. Meanwhile, in Europe, euro zone manufacturing survey will be closely watched.

Last week's range: $1.2925-$1.3319

Yen

The yen traded within tight ranges at the start of the week with Tokyo closed and no significant events in the markets.

Speculations that the Federal Reserve could raise its interest rates at a faster pace in future, helped the dollar against the yen. However, news that China may be getting closer to increasing the flexibility of its pegged currency regime limited the yen's fall against the greenback.

As the week advanced, the yen continued to lose ground and touched 106 levels against the dollar after the Fed announced its decision of interest rates raise to 2.75 pct.

The yen was also on the back foot after data showed big Japanese firms were less upbeat about business conditions and planned to cut back on capital spending, adding to worries about an economy already suffering from weakening exports.

Japan's business survey index for the January-March quarter fell to 0.6 from 2.1 in the previous quarter, reflecting the impact on confidence of higher oil and commodity prices.
Japan's "tankan" survey will be the key focus next week, which likely to show subdued business morale due to slack exports and rising oil prices.

Range for this week: Y105.00-Y108.00

Sterling

At the start of the week, sterling fell against the dollar after consumer inflation data came out lower than expected and dimmed expectations of another interest rates hike from the Bank of England.

The British CPI index rose by 1.6 pct in February from year ago, versus forecasts of 1.7 pct increase and below the Bank of England's 2.0 pct target. As the week advanced, the pound tumbled further against the dollar on expectations of rapid U.S. interest rates hike.

Meanwhile, sterling had muted reaction to minutes from the Bank of England's Monetary Policy Committee that showed a 7-2 vote to leave interest rates unchanged at 4.75 pct with expectations for an 8-1 vote.

Close to the weekend, the pound remained steady ahead of the long Easter weekend in U.K. Week ahead, UK manufacturing survey will be closely watched for clues on the outlook of the British economy.

Range for this week: $1.8550-$1.8850