28.07.2008 11:02

FOREX: weekly review

The dollar showed the second weekly advance against the euro as traders added to bets the Federal Reserve will raise interest rates from 2% this year. Philadelphia Fed President Charles Plosser said on July 23 rates should rise ``sooner rather than later'' to quell inflation. Hank Paulson, US Treasury Secretary, reiterated on Tuesday that a strong dollar was “very” important to US interests. He reassured investors that the US government was going ahead with plans to resolve the mortgage crisis. The comments helped to support financial stocks and lift the dollar. However, a wobble in US bank shares later in the week took some of the shine off the greenback’s advance.

The dollar extended its gain versus the yen and the euro as sales of new homes fell in June less than forecast and a gauge of consumer confidence unexpectedly advanced this month. Traders raised bets that the Federal Reserve will increase borrowing costs in September. Futures traded on the Chicago Board of Trade showed a 44% chance the Fed will increase its 2% target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 41% odds yesterday. Policy makers next meet Aug. 5.

The euro suffered after a raft of weak data out of the region suggested that the economy is faltering rapidly. Data showed that both the manufacturing and services sectors in the area is shrinking, highlighting that a recession is now a real possibility. The euro zone Purchasing Managers Index for services slipped to a five year low of 48.3 in July from 49.1 in June. Euro zone manufacturing activity also slumped, falling to 47.5 from 49.2 in June. Both figures were below expectations. At the same time, a key survey from Germany, the Ifo index also came in weaker than expected. The Ifo research institute said its July business climate index fell to 97.5 from 101.2 in June, dropping below analysts' forecasts of a decline to 100.0. The figure for June was revised down from 101.3.

The pound fell prey to weak data, this time on the state of UK retail sales which suffered a massive slump in June. Retail sales in the UK plunged in June by their biggest amount since records began in 1986 but inflationary pressures, particularly within food, continue to mount, official figures showed today. The office for National Statistics said retail sales in June dropped by 3.9%.

The yen weakened against all of the other major currencies as an unexpected increase in orders for U.S. durable goods last month bolstered speculation that investors will buy higher-yielding assets funded in Japan.