Sterling remains firm against dollar; yen gains strength

The dollar was kept on the back foot throughout the week as markets were disappointed by its regular failure to breach important chart levels.

Euro

The dollar started the week pretty much range bound as market players waited on the sidelines for a series of economic data releases from the United States, Japan and the eurozone.

The dollar's grip was soon to end as market players were disappointed by its failure to penetrate key chart levels despite a good performance by Wall Street over the weekend. Weighing heavily on the greenback were concerns of a possible U.S. attack on Iraq.

Cheney's comments put the dollar under pressure ahead of key data due mid-way through the week. Therefore, despite a record rise in non-defence durable goods, the market punished the dollar following a sharp drop in consumer confidence. U.S. durable goods orders rocketed 8.7 per cent in July, the biggest rise since a 9.2 per cent increase in October 2001.

The durable data suggested the U.S. economy might be on the road to recovery, but such expectations were dashed by the Conference Board, a business-backed research group, which said its index of consumer attitudes fell to 93.5 in August, its lowest levels since November 2001, from 94.7 in July.

Analysts had expected the index to come in at 97.0. Consumer spending represents two-thirds of the U.S. economy and is more important than the durable number because it was the consumer who drove demand for such durable goods as cars, computers and washing machines.

The dollar recovered slightly against the euro after the release of Germany's Ifo business climate index and short covering despite a poor performance by Wall Street. The highly anticipated German Ifo business climate index came in slightly lower than expectations, declining for the third consecutive month to 88.8 in August from 89.9 in July.

The business conditions component slid to 77.3 from the previous 77.9, while the expectation component also declined to 100.8 from a revised 102.4 in July.

German IFO's chief economist Gernot Nerb said that risks for the German economy are to remain weak and the projected 0.7 per cent growth rate for 2002 was difficult to attain. He added that he sees no downturn in Germany but that the pace of recovery has slowed.

The end of the week brought a number of crucial data due out in the United States. The dollar got a big blow with the release of U.S. weekly jobless claim figures. The rise in jobless claims to 403,000 for the week ended August 24, from a revised 395,000 the prior week, defied Wall Street expectations of a fall to 387,000 and sparked concerns about the health of the labour market.

Jobless claims rising above the psychological 400,000 mark for the first time since early July coupled with a poor performance by U.S. stocks was enough to push the dollar to fresh two-week lows of 98.75 cents.

However, the greenback did lift itself slightly on the last day of the week with the release of strong consumer spending and positive manufacturing data.

Dollar bulls took heart from the Chicago PMI, which showed U.S. manufacturing in the Midwest expanding for the seventh straight month in August. The index rose to 54.9 from 51.5 in July, exceeding forecasts.

Markets were also overjoyed after the government reported a surprise 1.0 per cent rise in consumer spending in July, a big enough increase to dismiss concerns sparked by a consumer sentiment report which showed confidence falling in August.

The University of Michigan's August consumer sentiment index fell to 87.6 from July's 88.1, against forecasts of a modest rise. However, the dollar did pull back slightly when blue chips stocks surrendered their gains, leaving the Dow Jones industrial average down a fraction of a per cent.

The Nasdaq also ended the week in the red zone falling 1.5 per cent after several negative forecasts for the technology sector.

The coming week will start on a light note with Monday being a Labour Day holiday in the U.S. Nevertheless, the U.S. calendar swings into action with the release of the ISM manufacturing survey on Tuesday, factory orders on Thursday and the August jobs report on Friday.

The ISM manufacturing index is expected to show a slight pick-up to 50.8 in August after a shockingly weak reading of 50.5 in July. German job data on Thursday will be under close scrutiny with the country's unemployment rate a key issue for voters ahead of a general election on September 22.

Range of the week: $0.9500-1.000

The Yen headed into the start of a new week on a positive note mainly due to selling by Japanese trust banks. Furthermore, the Nikkei advanced for the fifth consecutive day, gaining more than 200 points to close above the 10,000 level for the first time since July 30th, at 10,067.74.

Over recent weeks, Japanese investors have also been scaling back their investments in foreign stocks and bonds, further indicating that additional gains for Japanese stocks may be forthcoming.

However, the Japanese currency did try to test the 120.00 mark, climbing as high as 119.93, only to find massive selling interest above that level. Regardless to say, its inability to clear that hurdle prompted liquidation of long positions and U.S. speculators jumped on the bandwagon by selling the dollar heavily.

The yen continued to gain strength on dismal U.S. economic data and heightened war talks concerning Iraq. It fell below the 118.00 levels triggering stops along the way. Assisting the yen were comments from Japan's Economic Minister EcoMin Heizo Takenaka hinting at larger than expected tax cuts.

Takenaka stated that the proposed 1 trillion-yen tax cut may not be enough and added the government may consider revising growth after seeing fourth-quarter GDP.

A barrage of data due at the end of the week in Japan reinforced the view the country's economic recovery is fragile, but failed to give any major strength to the greenback. The dollar briefly sagged against the yen on the headline 0.5 per cent rise in Japan's April-June GDP from the previous quarter, against expectations of a growth of 0.2 per cent.

However, January-March GDP was revised down to zero and industrial production dipped 0.4 per cent in July compared with expectations for a 0.9 per cent rise. Other data on employment and consumer prices were mostly in line with expectations and reinforced market views that Japan's economic prospects remain poor.

Markets were more focused on the possibility of Japanese repatriation ahead of the country's half year end in September. Friday's strong manufacturing data helped the greenback to firm to levels of 118.70 but was brought down to levels of 118.40 due to lacklustre trade on Wall Street.

Range of the week: $ 116.00 – 121.00

Sterling

Sterling recovered against the dollar from last week's seven-week low on poor U.S. consumer data. Furthermore, positive UK data showed the booming British housing market was helping keep cash in the pocket of consumers.

The British Bankers Association said in its breakdown on an overall mortgage lending number released that remortgaging and equity withdrawal had hit all-time highs in July. House prices are a key measure of consumer demand in Britain, where over two-thirds of the families own their houses and most of the wealth is tied up in bricks and mortar rather than equities.

The continued strength of the housing market is likely to complicate the picture for the Bank of England's Monetary Policy Committee which left interest rates steady at 4.0 per