Forex report Mar.26-30, 2007

The dollar traded mixed all through last week, but slightly lower overall, especially the euro and Sterling. Last Monday an unexpectedly lower reading in new homes sales caused a sell off in the Greenback. Losses in the dollar were limited in afternoon trading, ahead of US consumer confidence report due out the following day and congressional statements from Ben Bernanke on Wednesday.
A rate cut before July is still very much in the picture for many traders. The yen stayed lower against the dollar.

The European currencies and the yen were higher against the dollar in early trading Tuesday morning, after a drop in the US consumer confidence resumed dollar shot positions. The euro was particularly supported by a stronger IFO number. The IFO business indicators tracks business conditions in Germany.

Durable goods orders in the US were reported at a lower than expected figure for February. This, combined with previous reports from the US earlier in the week send the dollar lower, especially against the yen, touching the lowest level for the week at 116.40. Later in the day, FED President Ben Bernanke testimony in front of Congress eased some of the dollar pressure. Bernanke reconfirmed that inflation risks are still high and future FED moves will be closely linked to economic performance.

The euro performed higher in early European trading Thursday morning after a report showed German unemployment reached a six-year low in March. The euro comfortably traded above the 1.3300 against the dollar. A much anticipated June rate hike by the BOE is still fueling the euro's strength and lately the economic data from the European Union is supporting this line of action.
In the US session the dollar recovered ground against the yen and Sterling after a report showed a 2.5% increase of the economy for the last quater of 2006. Also core inflation was reported at a higher level, confirming the previous day's vision of the Fed's President for a high inflation.

Friday morning the dollar was trading higher against the european counter parts and the yen, after a report showed consumer prices rose last month pushing core inflation to a 2.4% on the year. However, the gains were shortly lived, as by mid-morning the dollar came under selling pressure once news of a duty tax on certain Chinese product imports was out. Although the move if extended in the future to other type of imported goods can help narrow the trade deficit, the overall picture might still be far from dollar positive. China holds the world's largest currency reserves and a reduction of dollar reserves could seriously affect the US currency.

For this week we expect further dollar weakness, especially against the euro and Sterling on rate differentials expectations. The EU and UK are very likely to increase their benchmark lending rate in the coming months, while the FED might be forced to adjust the rates to 5% as early as July 2007. Elsewhere, the yen is still biased towards the downsize as carry trades are resuming. We expect high volatility in GBP/USD, USD/CHF and USD/JPY. In economic data the traders will be focusing on Friday's non-farm payrolls from the US.