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Euro
The week began on a serene note for the euro as most of the activity orbited around its Japanese counterpart. The euro remained subdued against the dollar as markets were keenly awaiting important U.S. economic data scheduled for release in the later half of the week.
The greenback drew support against the European currencies after Argentina's opposition-dominated Senate approved key details of a bill on drastic spending cuts.
The bill included cuts to state pensions and salaries, seen as the key to averting default by Latin America's third-largest economy. Meanwhile, weakness in the Swiss franc was also weighing on the euro. The Swiss franc fell as much as half a per cent against the dollar, hitting its lowest around the 1.7315 level, undermined by news that Swiss Re will buy U.S. insurer Lincoln National Corp's reinsurance business, Lincoln Re, for $2 billion.
Midweek, however, wrapping up its worst month of 2001 against the euro, the dollar spun its wheels as traders looked to key U.S. manufacturing and jobs data to see if a hoped-for U.S. economic revival would materialise soon.
A raft of mixed U.S. economic reports did little to clear a fog shrouding the dollar, which has fallen from 15-year peaks against major currencies earlier this month. U.S. consumer confidence took a surprising turn for the worse in June and fell to 116.5 in July versus a revised 118.9 in June.
An arduous drop in Chicago's manufacturing activity in July to 38 from 44.4 in June, bolstered the case for more Federal Reserve interest rate cuts. But the bad news was counterbalanced by higher than expected U.S. personal income and spending in June, which prompted investors to buy stocks.
Once again, increased pessimism for U.S. growth prospects sent the dollar reeling to a two-and-a-half month low of 0.8840 levels against the euro, after the U.S. manufacturing sector turned in another poor month in July.
The National Association of Purchasing Management said its monthly manufacturing index fell more than expected, to 43.6 in July, down from 44.7 in June. A reading under 50 signals manufacturing activity is contracting. Adding to the depression the U.S. Commerce Department said that construction spending suffered its sharpest decline in nearly a year, falling to 0.7 per cent.
However, as expectations for a near-term U.S. recovery fade, the euro has been on a tear, rising 3.13 per cent against the dollar, it's best month so far this year. But the euro failed to capitalise on the dollar's troubles on disappointment that the European Central Bank had decided to hold benchmark interest rates steady at 4.5 per cent.
The final day proved unlucky for the greenback as it continued on course for its fourth straight week of losses against the euro. The transit lower initialised after a report showed that the vast U.S. services sector unexpectedly shrank in July, underlining concerns the U.S. economy will face additional hurdles on the way to recovery.
The dollar began on a stronger note after the Labour Department said the economy lost 42,000 jobs last month, less than the forecast 50,000. Meanwhile, the unemployment rate held steady at 4.5 per cent, below expectations of a push to 4.6 per cent.
However, the gains evaporated and the dollar sank to a two-and-a-half-month low against the euro after the NAPM said its monthly non-manufacturing index fell to 48.9 in July from 52.1 in June. The euro surged as high as 88.76 cents, its highest since May 17th. In the week ahead the dollar is likely to trade on pins and economic indicators due from the U.S. will be scrutinised closely to determine the greenback's direction.
Range for the week: $0.8600-$0.9000
Japanese yen
The yen tolerated a major setback against the dollar at the start of the week, handicapped by weak Japanese output data and a fall in share prices, despite a convincing victory by Japan's ruling coalition in the upper house election. Japan's industrial output fell for a fourth straight month in June, slipping 0.7 per cent from a month earlier on a seasonally adjusted basis.
Earlier, the Japanese currency strengthened to 123.24 against the dollar, mirroring the strong poll results for the pro-reformed LDP. However, short covering which triggered stop-loss dollar buying between 123.60 and 124.20, sent the greenback well above the 124.50 levels.
Koizumi's LDP and its partners locked up more than half of the 121 seats at stake in the 247 seat upper house. The ruling coalition won a total of 78 seats.
The yen continued to sink and dropped to a two-week nadir of 125.37 on the back of comments from Japan's Finance Minister which seemed to signal tolerance of further yen declines.
Adding fuel to the yen's sell off, Japanese Finance Minister Masajuro Shiokawa said he would not adopt a policy of guiding the yen down but would let the markets decide foreign exchange levels. However, a rebound in the Nikkei stock index forced the greenback to give up some of its gains.
In addition, renewed market fears that the U.S. economy would recover only grudgingly after the release of weak U.S. manufacturing and construction spending reports, helped the Japanese unit to stage a superior comeback against the dollar. As there was no Japanese economic data to fret over, Vice Economic Minister Eiji Kawade reminded the market that the government might again downgrade its view on the economy.
The BoJ governor Masaru Hayami had also cautioned that the economy was in a very severe state, a comment that some took as a willingness to ease policy. However, many focussed on his assertion that bank had anticipated the worsening conditions when it last eased and was still waiting for structural reforms from the government.
The yen also garnered support from comments by Japanese Economic Minister Heizo Takenaka, who said the government was considering an extra budget for the fiscal year that started in April, but stressed that reforms was its top priority.
Business indicators last week should confirm the deteriorating economic environment in Japan, with money supply and machinery orders being crucial.
Range for the week: 122.00 - 127.00 yen.
Sterling
This week saw the pound surge against the dollar, supported by stronger than expected domestic data. The survey, by the Confederation of British Industry, showed retailers enjoyed an unexpected pick-up in sales in July with the pace of volume growth hitting its highest level in over a year, which invariably
