The markets will be looking for hints of an early increase in US interest rates when Alan Greenspan, chairman of the Federal Reserve Board, gives evidence to Congress this week on the US economy.
The Bundesbank is also meeting, on Thursday, and many believe it may take the opportunity to lower the German discount rate by a quarter or half of a percentage point before the summer holiday.
Some analysts, however, believe that the rate changes will be longer in coming. 'The currency markets will be holding their breath, but we don't expect a move until August at least,' said Josh Feinman, economist at Bankers Trust in New York.
'There is a very good chance of a US interest rate rise in two to three weeks, but not in the next few days,' said Gerry Holtham, chief economist at Lehman Brothers. 'The dollar may fall again in reaction to last week's rise, but the move will not be driven by underlying interest-rate changes.'
With figures last week suggesting that the US economic recovery was slowing, and with less threat of a rise in inflation, Mr Greenspan is likely to hint that there is no need for monetary tightening for the time being. Analysts expect him to indicate that the Fed will not move on rates until further evidence of an upsurge in US economic activity.
At the same time, the Bundesbank is having to take account of an unexpected surge in German money supply last month that is likely to delay the expected cut in interest rates until after the August holiday. 'The Bundesbank has a big job to overcome the market's concern over the rapid money supply growth,' said Brian Fabbri, at Midland Montagu.
'Until last week, everyone thought the Fed would tighten US rates. But the inflation data is good and the recovery looks weaker, so there is less pressure to tighten,' according to Steve Bell, economist at Morgan Grenfell. 'But the market will try to find a way of pushing the dollar lower again.'
The dollar fell to dollars 1.57 against sterling on Monday, after a slight recovery over the previous few days, but it rose again as dealers covered short positions during the week to close on Friday at dollars 1.5570.
Against the mark it rose from DM1.52 to DM1.55. Analysts believe that profit taking is likely to drive the US currency down again next week, but that the market is no longer primarily concerned at interest rate changes in the US and Germany. 'Dealing at the moment is driven by technical factors,' said Mr Holtham.Reuse content