US markets remain the focus

The dollar was steady above 15-year lows against a basket of currencies, as investors squared up positions following the currency's sharp falls last week, in the wake of the US Federal Reserve's half point interest rate cut.

There are many market participants who think that the dollar's recent decline may have been overdone, especially as there are now growing signs that the economic slowdown in the US is beginning to be felt around the world.

That was most evident on Friday in the flash PMI estimates for the euro zone's manufacturing and services sectors. Both showed a sharp drop. The manufacturing PMI fell to 53.2, the lowest level since November 2005, while services fell to the weakest since August 2005 of 54.0, both below forecasts for a smaller drop.

Though the readings remain above the 50 level that marks expansion in the sector, they confirm that the euro zone economy is taking a hit from the recent turmoil on financial markets and will further decrease the likelihood of the European Central Bank raising interest rates any further.

Nevertheless, the market's main focus remains the US, and this week's event risk remains high for the US currency. The economic data flow picks up, albeit that the market's attention will still firmly rest on conditions in the credit markets, liquidity issues and the stronger euro.

Indeed, with the global focus still on US growth concerns, it remains difficult to expect the euro to soften over the week ahead even though the euro zone economic releases are likely to be on the soft side.

Earlier on Friday, the euro hit a new all-time high of just below 1.4120 against the dollar, contributing to the fall in the dollar index to a 15-year low of 78.398. Analysts said the inexorable rise in the euro may prompt some attempts by European policy-makers to talk down the value of the single currency.

Until August, the European Central Bank could afford to lean back and let the rising euro do some of the monetary tightening for the ECB, however, the turmoil in financial markets, the heightened uncertainty about the growth outlook and intense political pressure have changed the situation. The current surge in the euro to a new record high is a serious issue for the ECB.

Though ECB president Jean-Claude Trichet has stressed the bank's independence in all economic matters, complaints from politicians have already begun. Speaking on French television, French President Nicolas Sarkozy continued to criticise the ECB's rate tightening bias and called for increased consultation with politicians on monetary policy.

Elsewhere, the Canadian dollar broke parity against the US dollar, reversing earlier losses stemming from weak Canadian retail sales figures, as oil prices hit another fresh record high.

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